Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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................................. 54 Figure 29: Calgary ......................................................Price History........................ 4 Figure 2: 1996 Average Prices/Margins ................................... 58 Figure 32: Toronto ................................................... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ........ 30 Figure 10: CPI Index Comparison ...................................... 62 Figure 33: Ottawa ................................................................Price History ... ex-tax elements .....................................................tax.................................................................................................... 69 Figure 36: Halifax ...... 36 Figure 17: Study Market Methodology ......................................................................................................................................................... 53 Figure 28: Vancouver .. 50 Figure 27: Victoria .......... Gross Product Margin ......................................................................................................................................................1988-1995 ......................... 47 Figure 24: Outlet Volume vs.. 24 Figure 5: Canadian Retail Outlet Population ......Price History ..............Price History ............................ 66 Figure 35: Saint John NB .............................................. 16 Figure 3: 1996 Average Regular Gasoline Margins (56....................................... 25 Figure 7: Outlet Representation by Mode................. 33 Figure 13: Monthly Gross Marketing Margins........................................................ Pump Price (nominal ¢/litre)......... 48 Figure 25: Outlet / Volume Relationship ..........................................................Selected Goods & Services .........Price History ...............................................................................................................................................................................................Regular Unleaded .....................Price History ........... 70 Figure 37: Charlottetown ...................................Price History.... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) .. 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)............................................ 44 Figure 21: Gross Marketing Margin Elements ........... 42 Figure 19: Pump Price ................. 28 Figure 8: Outlet Representation by Service ....................................................... 24 Figure 6: 1995 Retail Outlets by Province ........................................................................ 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.................................................................Price History.............Price History........................................................................... Income.................. 40 Figure 18: 1995 Average "Blended" Pump Price .. 29 Figure 9: Annual Gasoline Price (Cents per Litre) ...................... Costs......... 46 Figure 23: Average Annual Throughput per Outlet................................ 57 Figure 31: Winnipeg ......................................................................................................................Price History .........List of Figures Figure 1: Pump Price / Margin Model............................................................................8¢ Pump Price) ....Selected Centres ..................................... 34 Figure 15: Monthly Rack Prices: Selected Markets ................................................................................................................ 35 Figure 16: Monthly Demand vs.............................................................. 49 Figure 26: Outlet Revenues...............................................Regional & Urban Groupings........... 45 Figure 22: Petroleum Gross Product Margins .............................................. 63 Figure 34: Montreal .............................................................................. 43 Figure 20: Ex-Tax Pump Price Elements .................................... 71 MJ ERVIN & ASSOCIATES i ....................... 56 Figure 30: Regina ........................Price History........................................................

..................................................................................... 13 Table 2: Taxes on Regular Gasoline on December 31................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue...................................................................List of Tables Table 1: Downstream Sales Channels ................... 15 Table 3: Selected Study Markets .................................... 1996 ............ 51 MJ ERVIN & ASSOCIATES ii .............

This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. Natural Resources Canada (NRCan).3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.1 ¢ 5.4 ¢ 19.5 ¢ 0. 1996 Average Prices and Margins . Price competition occurs at three distinct levels in this industry. and a foundation for effective policy development. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.2 ¢ 24.8 ¢ TAX 28. together with a separate review of the refining sector. supplier costs and profitability.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. and ex-tax pump prices. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.5 cents per litre on the sale of regular gasoline in a typical major urban market. This study. and the Canadian Petroleum Products Institute (CPPI).Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. rack. These prices are determined in a competitive marketplace. represented by crude. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. each with unique MJ ERVIN & ASSOCIATES iii . the Canadian retail marketing sector realized an average gross product margin of 3.3 ¢ 28. dealer income.

this study focuses on the retail gasoline sector.dynamics. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). From 1986 to 1995. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. are examples of ways in which outlet petroleum sales are augmented by other revenues. and the traditional automotive service bay. nine of the past ten years. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. and declined by 10 cents per litre measured in constant dollars. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. car wash. compared to about 22. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . which potentially allow for reduced margins at the gasoline pump. While each of these marketing channels operates in a competitive environment. well over half of all outlets in Canada operate as lessees or independents.500 retail outlets were in operation in Canada in 1995. Convenience store. Approximately 16. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). due to its prominence in the public and media domain.000 in 1989. Dealers have a variety of relationships with their supplier. and accordingly. demand and other competitive factors existing at the time. The resultant margins are therefore a reflection of the state of product supply.

This has both resulted in. MJ ERVIN & ASSOCIATES v . Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. however.crude) 5¢ Marketing Margin (retail . improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.The “tax-included” nominal pump price increased over this same period. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. As a result of these trends. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. From 1991 to 1996. and has been a result of several factors including: • • • improved refinery utilization and efficiency. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. as a consequence of refinery plant rationalization (closures) and a modest demand increase.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991.

US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. several “outside variables” (product taxes. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. That such a relationship should exist was not surprising. and one by one.Comparison of Canada. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. 19 markets representing a broad range of conditions. wholesale product cost and freight charges) were isolated from the pump price. rural markets. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. This provided for market-bymarket and regional comparisons of key competitiveness indicators. MJ ERVIN & ASSOCIATES vi . With the participation of several CPPI member companies. With few exceptions. were selected for a detailed review of outlet economics. although this study provides an independent confirmation of this. A wide range of petroleum gross product margins were evident. to derive 1995 average petroleum gross product margins for each of the 19 markets. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. When petroleum gross product margins were compared to their corresponding outlet throughputs. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. This was integrated with selected NRCan price data. but also had significantly higher throughputs per outlet.

and/or distributed to shareholders. Consequently. an additional goal of this study was to undertake a comparison of outlet profitabilities.962 R2 = 0.000. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.000 3. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. revenues from ancillary operations (eg: convenience store. head office and regional office overheads.000.000. smaller markets. and his personal labour investment. and in major vs. the residual revenue is available as profit to be re-invested into retail operations. brand advertising. supplier profit: after the above costs are allocated. which reflects his investment in the outlet. of which gross product margin and throughput are only two of several factors. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. These costs would include salaries of marketing representatives and management. sales processing. corporate charity.6624 1.000 6.• Smaller markets performed as competitively as larger centres.000 2. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. This study showed that an average outlet net revenue in the 19-market study group was about $70.000.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool.000 Volume (litres) 4.000.. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000 5. etc. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. not poor competition.6634Ln(x) + 76.000. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .000.

000 $200. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. and that petroleum sales revenues alone.$154. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . suppliers likely incurred a net loss on outlet operations in 1995.000 per year. Average Outlet Income (before marketing overhead costs) BC/PR $300.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000) $(150.000 $50. were insufficient to cover outlet costs. after allowing for estimated dealer profit and supplier overhead. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. distant outlets are clearly higher than those associated with concentrated urban markets. respectively.000 $250.000) $(350. Despite this difference. Although an objective measure of competitiveness is elusive.000 $100.000) $(300. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . by all objective measures available to this study.000) $(100.000) $(250. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. for which this study had no specific data. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations.000 vs.market study group. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000) $(200.000 $150. The Canadian retail petroleum products industry. $61. 1. at 1995 prices.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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Nevertheless. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. Industry profitability is extremely sensitive to very small changes in pump price. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. When plotted against the margin-volume model. had petroleum margins which were commensurate with average outlet throughput for that market. Also. despite the predisposition of many observers to use them as such. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. these findings clearly show that pump price increases are ultimately linked not to increased profits. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). most outlets used in the 19-market study represent major integrated oil companies. Also. While these economics might appear to place this industry in a position of poor viability. regardless of size. assuming all other costs were unchanged. crude costs. if Canadian average pump prices were only one cent higher than they were in 1995. Thus. although this study provides comprehensive evidence of this. in the long term these fluctuations are likely more reflective of market restorations. Thus. Outlet throughput is a key determinant of inter-market pump price differences. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. and in turn. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). most markets. based upon an assumed posted rack price. but to increases in underlying rack prices. A wide range of petroleum gross product margins were evident within the 19market study group. When these margins were compared to their corresponding outlet throughputs. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . 8. although pump prices in some markets can fluctuate by several cents per litre in the course of a week.• • • improving production efficiency through refinery plant rationalizations (closures). not excessive profits. and the associated industry initiatives which are ongoing in nature. Indeed. That such a relationship should exist was not surprising. serve as perhaps the most significant indicators of competitiveness in the downstream industry. 7. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. this industry sector would have realized profits of unprecedented proportions. Thus. Both the downward trend in margins. virtually all of the 19 study markets exhibited similar levels of competition.

other factors exist which contribute to relatively high margins and prices.product margins than larger markets.5 million fewer litres of gasoline than a group A (major centre) station. poor outlet throughputs were generally the predominant factor. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. reduce pump prices. 9. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. While competitiveness in most smaller markets was shown to be as active as in larger centres. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. in order to build upon the findings in this study towards a full understanding of the dynamics at work. which could actually inhibit competition. which should. thereby improving petroleum volumes and ancillary revenues at the remaining sites. according to the margin-volume model. average pump prices were relatively high. The costs of most consumer goods in smaller. the solution would be to encourage some dealers to exit the market. • • At first glance. This created some economic pressure to sell product at a higher pump price. MJ ERVIN & ASSOCIATES xiii . isolated markets face particular challenges: although found to be highly competitive. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. reducing the number of outlets may also reduce the number of competitors. In suggesting this approach however. more isolated markets are generally higher than in larger centres. and this study showed that gasoline prices were no exception. there are three points to consider: • • In very small markets. The loss of employment represented by a station closure may be of some concern to smaller communities. it would seem that if local government in smaller markets were interested in lowering pump prices. A full-serve retail gasoline outlet typically employs 3-5 staff. Smaller. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts.

Also. and the traditional automotive service bay. are an acceptable limitation on pure competition (Finding 8). does not appear to benefit in consumer terms. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). A full analysis of the various features of the Nova Scotia and PEI regulatory structures. possibly to the detriment of the consumer. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. the degree of price competition in the retail petroleum has in effect. car wash. has seen a decline in pump prices relative to other Canadian markets. 11. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). is both the cause and consequence of increased activity in ancillary operations. as marketers find even more innovative ways to attract market share. Retail ancillary operations are a critical element of petroleum price competition. under the current PEI regulatory structure. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. sometimes below that of outlet operating costs. and in turn. characterized by narrow product margins and relatively flat pump prices. as it does in the Canadian petroleum marketing sector. that where a healthy competitive climate exists. As these findings show.10. will likely preserve a highly competitive petroleum market. This study proposes rather. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. many national and local environmental regulations exist for good cause. and likely others in Nova Scotia. the Halifax market. depressed petroleum revenues. is viewed as an agency which exists to the benefit of industry and consumer alike. The federal Competition Bureau for example. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. and the perceived effect on their markets. and as such. direct regulatory interventions may have an adverse effect on competitiveness. Convenience store. The historical record is clear however: since deregulating pump prices. Charlottetown. is well beyond the scope of this study. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. This competition then. MJ ERVIN & ASSOCIATES xiv .

Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. A regular comprehensive competitiveness evaluation. in a simple format designed for consumers and legislators. Improve public understanding and awareness of competition in the petroleum marketing sector. petroleum marketing competitiveness. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. and the nature of competitiveness influences.1. Public perception measurement. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. along the lines of the model used in this study. margins and competitiveness factors. using Canadian and foreign selected markets. This should be in the form of a quarterly summary of price trends and related measurements. • • MJ ERVIN & ASSOCIATES xv . not inhibit. and the converse image held in much of the public domain. Develop cooperative industry research into marketing sector competitiveness issues. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. 2. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. using Canadian and foreign selected markets.

MJ ERVIN & ASSOCIATES xvi . using Canadian and foreign selected markets. and in particular. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. • * * * Better understanding of this industry. and regulators alike. and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. consumers. by industry.

.. and in the process. and in comparison to the Canadian national average and nearby USA markets”. In 1995. face a number of challenges: a poor public image.. . This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions..to draw comparisons with nearby USA markets. or petroleum marketing portion of the study.Introduction Background Canada’s petroleum refining and marketing sectors. and regional differences which face the petroleum products retail industry.. the Canadian Petroleum Products Institute (CPPI). and . provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. A working group represented by Natural Resources Canada (NRCan). Specific purposes of this study would be: • • • • “.to determine the key factors which drive competitiveness in specific markets.to analyze the rack to retail market and the market structure for refined petroleum products. and Industry Canada was convened to undertake this project. competitive pressures from US and offshore refiners. region by region across Canada. to name a few. including a regional. Project Objectives The working group established as the primary objective of this study “.. and that issues and challenges be identified so that conclusions and recommendations can be made “.. and MJ Ervin & Associates was selected to undertake the “rack to retail”.to provide a sound database upon which more effective policy decisions can be made. or even communities within the same region.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. which comprise the “downstream” oil industry. .. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.. and a challenging array of potential environmental initiatives.to help the industry cope and to enhance competitiveness..to better understand the competitive opportunities and challenges. leading to more effective policies and reduced uncertainty for future investment. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. The SCF laid the foundation for supplementary studies..” MJ ERVIN & ASSOCIATES 1 ..

Specific comparisons of specific Canadian and US consumer markets were not made. Ultimately. Findings are stated in bold and are summarized in part E of this report. and a foundation for effective policy development. Unless otherwise stated. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Supporting data to these charts can be found in Appendix II. undertaken as part of this project to: • make a more detailed examination of price. Many of the findings in this report are presented in graphical form. and in order to provide insights into the range of competitive dynamics that can exist. It also relates consumer demand patterns to pump price fluctuations. through a multi-faceted approach. presents conclusions and recommendations which arise from the study findings. and the effect of competitiveness on each subsector.The study meets these objectives. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. or which have a specific meaning in the context of this report. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. The study does provide comparisons with US markets on a national level of detail. margins and demand patterns over the past several years. Part C: Historical Trend Analysis provides an overview of prices. due to the considerable data gathering difficulties that such an approach would entail. Part D: Selected Market Study presents the findings of a diverse 19-market study. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. • Part E: Conclusions and Recommendations summarizes the study findings and. in Appendix I. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. from which some important findings are made. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation).

through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI).. Environment Canada. through Maureen Monaghan and Huguette Montcalm. Petro-Canada. and their 481 retail associates whose outlet data was used in our analysis.. for their assistance. and provided critical guidance and feedback at several key stages in the process. including Ultramar Canada. Finally. and Shell Canada. CPPI. Suncor Inc. These included: Canadian Tire Petroleum. chaired the steering committee.. NRCan. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. and Industry Canada.• Industry Canada. Suncor Inc. • • Several organizations participated in two key review sessions. MJ ERVIN & ASSOCIATES 3 . Shell Canada. Consumers Association of Canada. We gratefully acknowledge these companies. and also participated in the steering committee. Ontario Ministry of Environment and Energy. Imperial Oil Ltd. The Canadian Petroleum Products Institute. Ministère des ressources naturelles du Québec. through Bob Clapp. Petro-Canada.. assisted in securing the support and participation of member companies in the selected markets phase of the study. Natural Resources Canada. facilitated some of the data gathering needs of this study.

principally of motor gasoline. multifaceted industry. as they are in Figure 1. most Canadians relate to this industry in one specific way: as consumers. its price. and serves to explain several factors that together determine retail gasoline prices at any given time. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. These relationships can be modeled. but simply. And. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. the particular quality of gasoline which is of most interest to consumers is not its colour. It is this particular feature of petroleum products . pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. texture.price . unlike many consumer products.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. In fact. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 .Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. Yet. or taste. as this study shows.

each essentially taking a share1 .from the total pump revenue. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. From an industry perspective. While this term is often associated with the phrase “profit margin”. Each margin is quantified by its defining prices. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. gross margin represents revenue only. A consumer however. objective measurement for competitiveness. this study examines competitiveness from the latter. consumer perspective. margins are squeezed or expanded accordingly.or margin . typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). Before examining each of the model elements. MJ ERVIN & ASSOCIATES 5 . Ultimately however. these stakeholder revenues are derived from the revenue from the retail sale. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”.Many of the terms introduced and explained in this section are used extensively throughout this study. this study’s use of the term relates to gross margin. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. “competitive” may be synonymous with “viable”. Gross margin is simply the difference between two price points. it is important to define the term “margin”. any operating expenses must then be considered before making any determination of profits. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. evaluating competitiveness is therefore a partly subjective process. So defined. an understanding of the term itself is necessary. is more likely to equate the term with “value for money”. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. and in fact inextricably related. While both perspectives are valid. (implying that the stated margin represents net income or “profit”).

This study therefore attempts simply to identify and illustrate competitiveness indicators which together. improving efficiencies.” “. or in other words. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . and unless care is taken to use the word precisely. in the sense in which it is something in the public interest. Competition can only be sustained therefore. Since a competitive market effectively limits the price option. the result of price competition is reduced profit. Accordingly. The actions by business rivals place an upper limit on the prices a firm can charge for its products.. one must ask how marketers compete. and ideally many entities offer the same or similar products (brand variety).Unlike many business or economic concepts. this usually requires a reasonable number of competitors. An effective functioning of markets also permits smaller competitors to expand if they meet the test. Conditions for a competitive market can be deemed to exist when: • • more than one. and the entry of new competitors and new ideas. competitors can either restore higher prices or reduce costs. To achieve this. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. a universally acceptable definition of competitiveness is elusive. is the only real option in the long term. Technological change and innovation are the large levers of competition in industry. Simply put. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors.” Price Competition in the Oil Industry In order to assess competitiveness. if market conditions allow a sufficient number of players to remain profitably engaged. as competitors seek to attract market share through lower prices.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. 1986: “Competition may mean very different things to different people. represents a process by which prices are set. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. More importantly.. Inevitably. the degree of competition within a market. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. provide some means for comparing the type and to some extent. it can frustrate communication and obscure analysis. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). in order to maintain some level of brand variety. Price competition. reducing costs.

or four P’s: Product. Basic Marketing: A Managerial Approach. 4th Ed. the raw material from which gasoline is made. which in turn defines a proper market price. competition in the crude and rack markets deserves some mention. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. 1960) 2 Although distinct.: Richard D. in rack markets. and are beyond the scope of this study. It is also important to stress that the market ultimately sets rack and retail pump prices. Place. Within the broad context of the oil industry. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. • Thus described. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. which in turn defines the margins. New York. and as will become more evident in this study. A refiner in Toronto may well compete with a refiner in Buffalo. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. The dynamics of upstream and refiner competition are major studies in themselves. 1971). most Canadians relate more in terms of retail gasoline marketing. Irving. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. is false. whose main activity is the exploration and development of crude oil. the geographic scale of competition is an important consideration. the “oil industry” consists of two distinct industries: the upstream industry. and the downstream industry. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. MJ ERVIN & ASSOCIATES 7 . where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. Nevertheless.44 (1st Dec. and in retail markets.. Jerome McCarthy. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. commonly known as the “marketing mix”1. The converse notion that the industry establishes a “should be” margin. Ill. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. and are generally known as integrated oil companies. In fact. p. some organizations have operations in two or more of these markets. particularly in the crude (upstream) industry and refiner sector. the most effective of these as a competitive tool is price. (Homewood. whose main 1 E. and Promotion. Price. so a brief description of these.the variables at their disposal. Given the commodity nature of petroleum products.

MJ ERVIN & ASSOCIATES 8 . Although this industry is not the focus of this study. rather than a fixed value. consequently. production. due to variables such as crude quality. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. Infrastructure The upstream oil industry encompasses a broad range of operations. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. and transportation of crude oil to the refinery plant.the raw material from which gasoline is made.activity is the refining of crude oil into petroleum products. it is important to examine its relationship with its neighboring downstream industry. from the exploration for potential crude or gas reserves. drilling. which it does on a continuous basis. alongside major producing countries such as Saudi Arabia. Canadian producers are known as “price takers” rather than “price setters” of crude prices. Within the scope of this study. in several commodities trading centres around the world. that is to say. gasoline grade. In providing historical comparisons of crude to rack/pump prices. implying that it fluctuates. which gives an accurate portrayal of month-to-month crude price fluctuations. as a minor contributor to the world crude supply. it is probably sufficient to say that. While this study focuses on the downstream industry (and in particular. Canadian producers have virtually no influence over world crude prices. Crude oil is a commodity which is traded in a global marketplace. and the delivery and sale of these products to the consumer. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. and refinery production methods. its marketing operations). and in the open market structure that exists in Canada. Canadian producers must compete to sell their production to refiners. The upstream industry’s crude price is represented in Figure 1 as elastic. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. our crude prices rise and fall according to price benchmarks established far beyond our own shores. which finds and produces crude oil .

as a factor of the regular gasoline retail pump price. This sector acquires crude oil. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. oil producers must explore for potential reserves. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. MJ ERVIN & ASSOCIATES 9 . day-to-day plant operations are cost-intensive. and numerous safety and environmental safeguards. personnel. From this revenue. is the provincial government.While some suggest that the price of gasoline should rise and fall exactly with the crude price. is called the refinery. and hopefully realize some production. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. crude is only one of several factors that influence pump prices. As is typical of many manufacturing organizations. In addition.1 cents per litre. As a general measure: Finding 2: 1996 average crude price. drill for. diesel. who manufacture petroleum products from crude oil. its predominant feature is the plant facility which. and pay out royalties to the resource owner. A modern refinery is a sophisticated work of engineering. manufactures a range of refined petroleum products including gasolines. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. The focus of this study is on the marketing sector of the downstream petroleum industry. put simply. and from this feedstock. in the petroleum sector. which in oil producing provinces such as Alberta. buy refined products from the refiner and sell them to the end-use customer. maintenance. involving energy. and some attention to the refiner sector is therefore given here. was 19. or roughly 34 percent of the pump price. and lubricants. and marketers who. heating fuels. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however.

this is the “internal” price charged by a refiner to the marketing arm of the same company. the gross refiner margin is elastic. and a return on the considerable capital investment in the plant facility. external measurement of the current market value of a particular petroleum product. confidential terms between the seller and specific buyers. less the price at which it bought its raw material2 (rack price minus crude price). For simplicity. transfer price .the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. which may cause Gross Refiner Margin to be slightly overstated.Price/Margin Model Elements For simplicity. reflecting the cost of transporting the crude from the producing region to the refinery plant. many of which do not have integral refineries. and accordingly. Wholesale volume data is not readily available on a market-specific basis. 1 Dealer Price is not included here. there would be little or no market-driven competitiveness in the refiner sector. Contract and transfer prices are not openly shared. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. Although contract and transfer prices are distinct from rack price. but with no material effect upon the Gross Product Margin derivation. contract price . a considerable volume of petroleum product must actually trade using rack price as the transaction basis. being squeezed or expanded between these two price points. On a national basis however.the price charged for immediate supply on an “as available” basis. some clear competitiveness indicators exist. This margin provides for plant operating costs as described above. indicative of a competitive wholesale rack market. representing major Canadian population centres. since the market-driven rack price provides an objective. Since both crude and rack prices fluctuate according to market forces. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. While refineries are always rack price points. the relative competitive strength of any given rack market is difficult to assess. refiners sell their product under a variety of arrangements. this model only uses the benchmark crude value. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. as they relate to negotiated. Of these three refiner prices. only rack price information is readily available in the public domain. In fact. the gross refiner margin is the price at which the refiner sells its refined product. they use rack price as their basis. In fact the refiner typically pays a higher price than the benchmark crude price. The existence of rack price in a given market is not of itself. not the refiner sector. which provides an independent and objective determination of rack-based gross refiner margin. as this price point exists within the marketing sector. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. 2 MJ ERVIN & ASSOCIATES 10 . For a competitive rack market to exist. If for example. which can be broadly categorized as follows1: • • • rack price . In simple terms.

petrochemical producers. who compete for a share of this demand. wholesale refined product is bought and sold across very large distances. and in the case of gasoline. market-driven Rack (wholesale) pricing of petroleum products. In examining the structure of the Canadian refiner sector. for example.for example. but at the expense of marketing income. integrated refiner-marketers establish transfer prices at. As shown in Figure 15 (page 35). arises. potential sources of wholesale product supply for most Canadian non-refiner marketers. market-driven rack prices. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. from any one of several regional refiners. this limits a marketer to a relatively short range (perhaps 1. many US and European refineries are in practice.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . most refiners also participate in the marketing and retailing of petroleum products. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). to major industrial consumers. or transfer price. Canadian refiners must therefore be price competitive not only with each other. In practice. as there is no obvious market mechanism to regulate its setting. due to the relatively small transportation cost. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. but where pipeline or marine fuel terminal facilities exist. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. MJ ERVIN & ASSOCIATES 11 . In practical terms. In these cases of so-called “integrated” refiner-marketers. but with their US and European counterparts. in order to maintain realistic accountabilities within each of the two sub-sectors.000 km) for overland truck transport. Integrated Refiner-Marketers In Canada. the question of the internal selling price. The mechanisms that drive rack prices are more fully discussed on page 36. or close to. even overseas. would produce better than expected refiner income. 1 Based on Octane Magazine Retail Outlet Survey data. and which supply petroleum to about one-third of all retail outlets in Canada1. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. who themselves do not refine petroleum products. to so-called “independent” petroleum marketers.

Retail Sales to the domestic motorist. home heating. farming. or in the case of cardlock facilities. Marketing operations within this sector can be broadly classified into three elements. gasoline price and competitiveness issues attract considerable public. trucking.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. For this reason. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. It is this sector which has direct contact with the petroleum consumer and it is this sector. including mining. which “sets” the retail price of gasoline. as a popular and relevant “window” on the petroleum marketing sector. and aviation. in the minds of many consumers. principally into commercial trucking operators’ vehicles. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. Within this industry sector. product is sold from a central facility. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. and who essentially deal directly with the refiner. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. the most recognized element of the downstream oil industry. Wholesale Sales to a wide variety of customers. and purchase at or near the established rack price. media and regulatory attention. • • MJ ERVIN & ASSOCIATES 12 . Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. each with its own distinct infrastructure.

in smaller centres. and usually supply customers by delivery to the customer’s own storage tank. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. There are over 850 cardlock outlets in Canada. There are over 1. Direct sales generally do not involve any marketing sector infrastructure. often delivered by pipeline or ship/barge. at a negotiated contract price. one final element of the pump price model must be reviewed. according to the contractual relationship between the supplier and the dealer. Sales to major industrial accounts. Sales of home heating fuels to residential furnace oil customers. Sales of aviation fuels at major and secondary airports across Canada. and regular gasoline in particular. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Before examining this sector in detail. Sales to non-refiner petroleum marketers. for example.300 bulk sales outlets in Canada. by delivery tank truck. heating fuel delivery is an integral part of a bulk sales outlet. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts.500 retail gasoline outlets in Canada. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Sales of petroleum products through bulk sales outlets. Sales to spot buyers at posted rack price. usually involving some aspect of the marketing sector infrastructure. Sales to commercial and industrial accounts by the wholesale marketing sector. typically at the “rack point”. There are about 16. In major centres dedicated Home Heat centres provide this service. to the aviation fuel consumer. MJ ERVIN & ASSOCIATES 13 . which is generally less than the rack price. These outlets usually have considerable inventory capacity. as discussed. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. using delivery tank trucks. as principal elements of petroleum marketing operations. Retail outlets are operated in a variety of modes. such as product transport and/or storage. to the motorist consumer.

1 Due to the application of GST (and in Quebec. would include a roughly 0. or roughly 50 per cent of the pump price. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. provincial sales tax. MJ ERVIN & ASSOCIATES 14 .2 cent (0. and seven percent GST. PST). the tax content of retail gasoline in Canada has increased steadily over several years. If the pump price decreases for example. A three-cent drop in pump price.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. in a small number of markets.3 in Quebec) drop in the tax content. which amount to 28. The petroleum industry acts as a collector of these taxes. for example. As part C of this study shows. regardless of market conditions. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. Table 2 shows the provincial tax content for retail gasoline. the tax content of the petroleum price is essentially a pre-determined.6 cents per litre (Canada 1996 10-city average). stable amount. typically made up of: • • • • a ten cent per litre federal excise tax. tax content does fluctuate somewhat with pump price changes. municipal taxes.

MJ ERVIN & ASSOCIATES 15 . Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 10.0 15.6 22. plus a 6.7 13.5 14.0 16.0 cents is charged in the greater Victoria and Vancouver areas respectively.7 3.0 10.2 24.6 3.0 10.0 4. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.5 6.0 10.0 10.2 10.5 cents and 4.0 10.5 Total Tax 24.Table 2: Taxes on Regular Gasoline on December 31. All Quebec gasoline sales are subject to a 15.6 25.0 9.0 3.5 3.3 10.0 27.0 10.1 25.3 Federal Excise Tax 10.5 12. An additional pump tax of 1.9 3.0 10.3 27.0 28.8 note 1 note 2 An additional tax of 1.7 18.0 3.0 28.6 3.5% sales tax applied to the GST-inclusive pump price.0 GST content (7% of pump) 3.2 24.8 4.7 30.1 32.5 cents was introduced in the Montreal and surrounding area in 1996.2 cent per litre pump tax.0 10.0 10.3 20.6 3.0 10.0 14.0 11.4 3. Provincial Tax 11.0 10.6 3.

3 percent of the average regular gasoline posted pump price. Upstream operations realized 19. The residual. some profit return for the shareholder. This 1 Prices and margins reflect a Canadian 10 city average.3 ¢ 28.4 ¢ 19. or 50.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. including retail outlet distribution. was available for product marketing operations.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.1 cents per litre. and the retail gasoline sub-sector in particular. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). and ancillary operations.3 cents per litre. the brand supplier’s costs. It also provides an overview of the industry in terms of several infrastructure parameters. or 9 percent.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. or 34 percent of the pump price. and potentially.2 ¢ 24. MJ ERVIN & ASSOCIATES 16 . to derive a representative value for regular gasoline gross product margin in Canada.1 ¢ 5.5 cents per litre (after freight cost). operating modes.6 cents per litre.5 ¢ 0. 3. namely the dealer’s costs and income.8 ¢ TAX 28. Refiner operations realized 5. this section provides a view of the Canadian petroleum marketing sector. Figure 2: 1996 Average Prices/Margins .Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. based on regular unleaded gasoline.

which in the case of retail gasoline. is the second of two elements of the downstream oil industry. petroleum taxes accounted for 50. The marketing sector then. Although many petroleum marketers conduct their own freight operations. and it is depicted in Figure 1 as a fixed cost element. See page 10 for further explanation.5 cents per litre. Based on the 1996 data.gross product margin represented 6 percent of the Canadian average regular gasoline pump price.3 cents per litre. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. and rack price. as part C will describe. is defined by the marketdriven price points of ex-tax pump price. In 1996. it falls into the domain of the marketing sector. was 3. Freight cost does not typically fluctuate. is usually the gas station. for example) is sold/transferred at the current rack or transfer price. was 5. three key findings can be stated: Finding 4: Finding 5: In 1996. In 1996. Freight MJ ERVIN & ASSOCIATES 17 . and is then transported to the retail outlet. or “rack to retail” margin. Bloomberg rack price values were used as the assumed wholesale price. The gross marketing margin. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. Both refiner and marketing margins have been in decline over the past several years. As the product leaves the refinery plant. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. this is seen as a “non-core” business.3 percent of the average urban price of regular gasoline in Canada. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. In referring to marketing margins and product margins. and is often out-sourced to third-party common carriers. the finished product (gasoline.

but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. Unlike most other retail enterprises however. and upstream/refiner margins.costs are generally less than one-half cent per litre in most major Canadian cities. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . storing and dispensing a product such as gasoline adds considerably to the operating cost. Figure 3: 1996 Average Regular Gasoline Margins (56. which are typically close to a wholesale rack point. and is therefore a poor comparative tool. as it excludes the “outside variables” of tax. an average gross product margin for regular gasoline in a major Canadian city was 3. but at an average cost of over $200. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). As represented in Figure 3.000 per outlet. petroleum marketers.5¢ Product Operations Freight 0. Gross product margin is therefore defined as gross marketing margin less freight cost.8¢ Pump Price) Upstream Operations 19.6¢ Refiner Operations 5. typical of any retail business.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. together with gas station dealers. as it represents 80% of all retail gasoline sales. freight. This is a particularly useful measurement in comparing retail gasoline markets.5 cents per litre in 1996.3¢ 3. incur a variety of costs. Posted pump price includes all of these variables. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products.1¢ Tax 28. • Product sales: Within this domain. rural markets experience higher pump prices than do larger centres.

page 24). one must ask how marketers compete. etc. Higher octane grades are more expensive than RUL. Jerome McCarthy. Today. and Promotion. Simply put. This study does not examine such a broad issue however. seasonal blends. Place. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. Price competition has forced marketers to optimize outlet revenue. or when comparing price levels between markets. competitive strategy of this type focuses heavily on selecting the best place. Irving. 2 E. a number of factors preclude this type of strategy. Although revenue from this product is factored into the study market economics in Part D. (Homewood. propane vs. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. RUL prices are therefore most often cited when relating historical price trends. marketers compete to be represented in as many and/or the best locations as possible. but most consumers view gasoline as a commodity. p. The grade differential varies somewhat from city to city. 1971). In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. and accordingly. and the price difference between these grades and the RUL price is referred to as the grade differential. Today. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content.: Richard D. 4th Ed. Basic Marketing: A Managerial Approach. • Product In the past decade.” or four P’s: Product. commonly known as the “marketing mix2. marketers compete for the consumer’s choice of transportation energy (for example. rather than the most places.44 (1st Dec. Place Typically. 1 Diesel is another petroleum product sold at many retail outlets. In order to measure competitiveness. as gas stations proliferated. Price.). but in 1995 was typically 5 cents per litre for midgrade. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. A portion of the market certainly responds to this type of competitive strategy. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. additives. marketers have attempted with some success to differentiate their product offerings from other brands. and 9 cents per litre for premium gasoline.. 1960) MJ ERVIN & ASSOCIATES 19 . Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Ill. will ultimately purchase based on price. expanded product/services offerings such as convenience items. it represents a very small percentage of total retail petroleum sales.retail gasoline sales respectively1. gasoline). Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity.

free item with purchase or special price item with purchase. uniform prices .contrary to some public perception. and therefore “trades” within a relatively narrow price range.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. Examples of promotional competition are: • • • brand identity gasoline discount coupon. Establishing an objective measurement of price as a competitiveness indicator however. Examples are: • prominently displayed prices . and more importantly. Consequently. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. price has proven to be the most widely used competitive tool by gasoline marketers. Promotional activity seems to have decreased in the past few years. • Price In most markets. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. volatile prices . probably due to its relatively high cost. fluctuating pump prices are a significant indicator of robust competition among marketers. is less clear. As such. gasoline is a commodity. this study examines the dynamics of price competition in considerable detail. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. This study presents an extensive historical and comparative analysis of pump prices. MJ ERVIN & ASSOCIATES 20 .while uniform pump prices are sometimes cited as evidence of industry collusion. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. gasoline is viewed by consumers as a commodity uniform in quality and widely available. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. volatile pricing manifests itself in the form of a price war (see below). and due to the already slim margins available to marketers. low prices and/or margins. their subsector margins.• • closure of non-viable outlets. due to the largely commodity nature of petroleum product. Promotion In the gasoline retailing sub-sector. caused by price competition. At its extreme. In this context. • • • While examples of all of these indicators are abundantly in evidence.

the relationship between the supplier and dealer is generally as described on page 25. In the case of lessee or independent dealers however. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. the supplier may temporarily intervene. in order to maintain a reasonable market share. obviously at the expense of the supplier margin. or when prices rise or fall apparently in unison. 1 This does not occur at company operated or commission outlets. the wholesale rack price. or even being squeezed to zero . This is a misconception. To understand the phenomenon of uniform pump prices. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. The effect of this upon the gross marketing margin is obvious: it is squeezed.When pump prices are uniform. in an attempt to gain market share. but to competitors. When this occurs. its effect is to restore some measure of the dealer margin. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. assuming that the rack price is unchanged. one must adopt the perspectives of both consumers and competing. MJ ERVIN & ASSOCIATES 21 . Finding 7: Price uniformity and price volatility. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. who then react quickly to the change. since there is no “dealer margin”. The other dealer has little choice but to quickly match. competitors may not follow. If the posted price increase is too high. and provide to the dealer what is commonly referred to as price support. or even less than. for example). Whether through falling pump prices or rising rack prices. Pump prices therefore tend to move uniformly within a very short time. or even undercut the competitor’s lower price. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. While this support may take one of several forms. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. facilitated through street price signs. since they too must restore their gross product margins to sustainable levels. competitors will likely match this price. the effect on many consumers is immediate: they will drive into that station. If one dealer decides to reduce pump prices (by two cents. bypassing the higherpriced outlet. Price Support In times of “normal” pump prices.where the ex-tax pump price is equal to. Pump price signs are an ubiquitous feature of the retail gasoline industry. are indicators of a competitive market. adjacent dealers.

or of direct government intervention in marketing. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. While this study does not intend to undertake a detailed review of the effect of the Act. There are few current examples of direct government intervention in the pricing of petroleum products. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. More recently. and a brief discussion of this case appears in part D. which is administered by the federal Competition Bureau (Industry Canada). 1997 MJ ERVIN & ASSOCIATES 22 . These cases have largely involved local dealers and/or isolated incidents. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. An examination of the effect of the Competition Act. but reverts back to the dealer when the support arrangement is ceased. provincial and even municipal levels. the Bureau found that there was no evidence to support these allegations1. A review of historical retail pump prices in the Halifax. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996.Under the provisions of some price support mechanisms. In addition. however. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. Following a year-long investigation. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. the petroleum marketing sector has been the subject of several inquiries at federal. is beyond this study’s scope. resulting in 9 convictions. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. control over retail pump price effectively reverts to the supplier. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. In addition. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition.

exit from an non-viable market. A practice. Many smaller retail owner-operators. or inhibiting. but exist to meet other important societal needs. This issue is discussed more fully in part D. or incentive for. Retail gasoline sales. accounting for roughly 88% of all gasoline demand. a competitive climate. to some degree. and is the single largest market for gasoline products.500 retail gasoline outlets across Canada. entry into an attractive market. one can cite examples of regulatory obstacles to exit from the retail gasoline market. As a product group however. creating a need for higher margins. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. accounting for 41% of all petroleum demand. The high cost of building a modern retail gasoline outlet for example. accounts for about 37% of all refined petroleum demand in Canada. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). that is. MJ ERVIN & ASSOCIATES 23 . for safety and environmental protection. it is the single largest one. and consequently. creates an obstacle to. higher pump prices. as outlined above. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. It is important to acknowledge that many regulations affecting the retail gasoline industry. promotes or limits market-driven pump prices. sales of gasoline through the roughly 16. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. is in part. particularly in smaller population centres. it is clear that government policy plays an important role in facilitating. inhibit competition. in the form of standards for the decommissioning of retail petroleum sites. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. These regulations clearly exist to the benefit of all. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. So defined. or incentive for. Conversely. and at least some of this capital cost is regulatory compliance-driven. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil.

9% Diesel Fuel 22.6% Other Gasoline 4.7% Light/Heavy FuelOils 14.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.9% PetroChem Feedstocks 5.2% Retail Gasoline 37.2% Propane /Butane 2. as shown in Figure 5.2% Other 0.2% Asphalt/Coke 4.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 . nor is there any federal or uniform provincial enumeration of retail gasoline outlets. This survey accounts only for major established retail networks .3% Total Sales Volume: 84.7% Lube/Grease 1. This study provides an estimate of the actual retail outlet population. Figure 5: Canadian Retail Outlet Population .it has no practical means to enumerate each and every outlet.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.

and usually owns the brand name seen at the retail outlet.000 outlets in 1989. Distribution of these outlets by province (Figure 6. as owner of the product. and this is of some importance with respect to the matter of prices and competition in this sector. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. and all inventory and revenues belong to the supplier. The principal dealer and attendants are salaried employees of the supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. to about 16. as one might expect. the retail outlet is owned and operated entirely by the product supplier. using Octane counts only) is roughly equivalent to population densities. controls the setting of the pump price. exist between retail dealers and their suppliers. who manages the day-to-day operations at the retail outlet.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . who holds initial title to the refined petroleum as it leaves the rack point. and the dealer. The supplier.The estimated number of retail outlets in Canada has declined from 22. Several possible relationships.500 in 1995. or modes. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.

usually based on cents per litre of petroleum sales.the entire gross product margin accrues to the brand supplier. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.sub-component margins . the outlet facilities and petroleum inventory is owned by the supplier. supplier salary from supplier. an employee of the supplier supplier supplier typically the dealer. based on pump sales volume. but the outlet operator (“dealer”) is compensated by a commission payment. The dealer in turn hires attendants. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. Since the supplier owns the petroleum product at this type of outlet. who pays all outlet operating costs. Control of Pump Price Dealer Compensation supplier a commission from the supplier. and pays them from his commission revenue. The “dealer” is in essence. the supplier retains control of the retail pump price. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 .

not the supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. The margin between these two prices is the dealer’s gross revenue. and sells at the posted pump price. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee.product from the supplier at a “Dealer Wholesale” price. and has control over the retail pump price. dealer-established retail price. since it is predicated on contractual arrangements between the dealer and the supplier. This Dealer Price. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. the retail facilities are owned by the dealer. can vary considerably from one supplier to another. MJ ERVIN & ASSOCIATES 27 . and means of compensation supplier. unlike rack or pump prices. less the Dealer (wholesale) Price charged by the brand supplier. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. The margin between these two prices is the dealer’s gross revenue. This dealer margin is defined as the pump price (ex-tax). The dealer pays most or all of the expenses associated with operating the outlet. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. and in turn resells to the motorist consumer at a higher pump price established by the lessee. and sells at the posted pump price.

There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. In addition. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. 1 Unless the dealer is under a price support arrangement (for instance. MJ ERVIN & ASSOCIATES 28 .Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. and fully two-thirds operate as lessees or independents. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. virtually none of the major integrated outlets are company operated. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. The remainder represent one of over 50 different marketer organizations. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. or Imperial Oil). While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. during a price war) as previously described. who themselves establish pump prices. some general figures are mentioned here. Petro-Canada.

In fact. Figure 8 depicts the Canadian representation of several key ancillary services. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. to over five million litres in major markets such as Toronto.While an average outlet throughput may be in the order of 2. more fully described in part C. Based on a sampling of outlets surveyed in this study.5 million litres. Improved outlet revenue from ancillary operations has caused. Canadian throughputs have dramatically improved in the past several years . who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. has had a profound effect on the retail gasoline marketing sector. In effect. which in part has led to a reduction in retail product margins. Most ancillary services are operated by the dealer/lessee. ancillary service has had the consequence of subsidizing the pump price of gasoline. average annual throughputs ranged from under 1 million litres in smaller population centres. and is a result of.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. feature both a large-area convenience food store and a modern car wash facility. these study findings show that this can vary widely from market to market. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . Many outlets have more than one ancillary offering: many “flagship” outlets for example. reduced petroleum margins. These improved outlet throughputs have provided for improved petroleum revenue potential.

Since 1 Data is not regularly collected on smaller markets. As such. An “all markets” average. and with which the reader should be familiar. Regional and market-to-market comparisons are presented in greater detail in part D. would be somewhat higher. using a Canada 10city weighted (by provincial demand) average.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. This shows that pump prices have increased in nominal terms. MJ ERVIN & ASSOCIATES 30 . including smaller markets. While some of the presented findings are selfexplanatory. Unless noted. particularly around 1990. prices are for regular unleaded (RUL) gasoline. an examination of the specific historical record of gasoline prices is useful. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. Since rising prices are common to most consumer goods and services. the “Canada average” price reflects an average of urban markets only1. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. mainly using Canada average values. many utilize terms which are explained in part A. when the Persian Gulf War caused crude prices to increase significantly. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. This part examines broad trends in several areas. as can be seen in part D of this study.

It also depicts the associated margins. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. ex-tax equivalent prices. retail pump prices were about 7 cents less in 1995 than they were in 1986. In constant dollars. When pump prices are reduced by the amount of tax content. as in Figure 10. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. MJ ERVIN & ASSOCIATES 31 . nominal pump prices decreased. Figure 10: CPI Index Comparison . and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. and relative crude cost. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). rack price. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. as defined in part A of this study. When compared to other consumer goods.1990.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages.

nor do rack prices exactly follow crude costs. it simply passes on a fixed cost margin to determine the “correct” pump price. the downstream industry operates on a “cost-plus” basis. and the rise in the tax content. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. as shown in Figure 12. Figure 12 shows that industry margins have not been constant over time. then one might expect margins to be quite constant over time. due to additional market factors which affect pump and rack prices at any given point in time. are principally a reflection of changes in the underlying price of crude oil. and have risen slightly since 1994. as might be suggested. MJ ERVIN & ASSOCIATES 32 . as Figure 11 shows. In fact. If. it is also useful to examine the behavior of margins. It is important to state that pump price changes do not occur in exact lock-step with rack prices. the presence of these additional market factors have operated to the benefit of consumers.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. that is. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. as the next section shows. Margin History While Figure 11 provides an indication of key price trends. which are defined by the price points. which in turn. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. and in fact have displayed a declining trend over the past six years.

MJ ERVIN & ASSOCIATES 33 . and has been a result of. The decline in refiner and marketing margins has both resulted in. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. not weekly or daily data. Finding 13: From 1991 to 1996. which have both shown a consistent decline throughout the period 1991 to 1996.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. since the chart is based on monthly averages. the gross marketing margin can fluctuate quite significantly1. A more thorough discussion of specific market factors for these and other centres appears in part D. the actual fluctuation is much more pronounced than shown. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. compared to the Canadian average. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. several factors. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. This shows that on a monthly basis. this upward trend is not attributable to “downstream” refiner or marketing sector margins. as local competitive factors act to self-regulate pump prices.crude) 5¢ Marketing Margin (retail . In particular. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . 1 In fact.

resulting in significantly higher Canadian gasoline prices. This shows that. This difference accounts for most.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. US Price History The retail gasoline tax structure in Canada is vastly different than the US. this is wholly attributable to the difference in taxation. if not all of the difference in pump prices between Canada and the US. On an ex-tax basis. for several years. A comparison of Canadian and US regular gasoline pump prices. US pump prices. or even less than.Figure 13: Monthly Gross Marketing Margins. Canadian pump prices have been roughly equal to. although Canadian pump prices in urban markets are clearly higher than in the US. is presented in Figure 14. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . with and without tax.

there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. have improved considerably. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . This would be a useful area for further research. largely as a result of two factors: • Canadian marketing margins have decreased in this period. as a result of outlet closures (see Figure 5. behave in a very similar fashion. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. From this it can be seen that Canadian and US rack prices. Canadian outlet throughputs (although likely still less than those of the US). page 24) and somewhat increased demand. While these trends have also occurred in the US. • Although this study shows that on an ex-tax basis. Figure 15 compares these values for selected Canadian and US centres over a period of several years. and moving up or down more or less in unison. Prior to 1994. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. both a cause and an effect of improved throughputs and ancillary revenues as previously described. RFG has not been introduced to Canadian markets. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. This is no longer the case however. trading at any given time within a relatively narrow (about 2 cents per litre) range. which is reflected in US average pump prices. when compared on an ex-tax basis. Canadian ex-tax pump prices were historically somewhat higher than in the US.

000 2. compared to average ex-tax regular gasoline pump price for the same period. Yet in the latter half of each year.500.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.900.500.900. Figure 16: Monthly Demand vs.000 1. but in fact across the North American continent (US demand follows a similar pattern).100. and prices tend to fall. and falling in the latter half of each year. albeit less distinct pattern. and as would be expected in any commodities market under these conditions. or sales.700. increasing significantly every spring. rising and falling closely in step with demand. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). of motor gasolines from 1991 to 1996.300. Pump Price (nominal ¢/litre) 3.100.000 2. Simply put. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . the price tends to be bid upwards.000 34¢ 2. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. Gasoline demand exhibits a very regular seasonal pattern. Gasoline price exhibits a similar. As non-refiner marketers attempt to secure a supply of this diminishing inventory. Price History Figure 16 shows the history of Canadian gasoline demand.000 1.000 2. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. or indeed anywhere. conditions begin to favour a “seller’s market”. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.000 2. a “buyers market” develops. not only in a given market. Demand vs.700. as demand ebbs and inventory improves.000 24¢ 1.

which consists of the refiners and marketers of gasoline and other petroleum products. so do prices. the downstream petroleum industry. which ensures a competitive product price for buyer and seller alike. while world crude prices and Canadian taxes have generally increased over the past several years.3%. On a long-term basis however. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. pump prices have increased due to a significant rise in crude costs in this period). demand rose approximately 8. while average ex-tax pump price declined by 14% (since 1994. and product taxes which add to the consumer price of gasoline. the essence of a free market economy. their related product costs and margins. in that prices have fallen. has operated in a highly competitive environment.Whether in the spring or the fall. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. All of the findings suggest that. gasoline prices have not followed the traditional model. as evidenced by declining industry margins. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. This part of the study presented a number of historical views of retail gasoline prices. a feature of most marketregulated commerce. Figure 16 shows that from 1991 to 1995. MJ ERVIN & ASSOCIATES 37 . This is of course. despite a rise in demand. The traditional supply-demand model predicts that when demand rises. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. competing to meet their own needs.

ancillary revenues. Nineteen markets were therefore adopted for the study (Table 3). etc. freight. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. and a more detailed examination of price. MJ ERVIN & ASSOCIATES 38 . which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. • Methodology Selection of Markets A number of markets were selected for the study. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and in order to provide insights into the range of competitive dynamics that may exist. namely product margin. although one was subsequently dropped due to insufficient submitted data. outlet volumes. A number of factors such as taxes. there is no regular monitoring of pump prices in smaller centres. These “outside factors” tend to obscure the more relevant aspect of pump price. and pump prices alone provide very little opportunity for “comparability”.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. is useful in providing broad overviews of industry price and margin trends. outlet costs. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. play a role in a market’s pump price..

and consequently competitiveness . Five companies responded to this request: Imperial Oil. Furthermore. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. but a number of variables. 2 Depending upon the outlet mode. and for smaller markets. Process Overview As illustrated in part A. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. these organizations provided market-level data on freight costs. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. the gross marketing margin must be examined in isolation from those other variables. retail outlet and brand representation. In addition. MJ ERVIN & ASSOCIATES 39 . and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. Petro-Canada. and Canadian Tire Petroleum. To examine the competitiveness of the marketing. Ontario.000. price history data not available through public sources. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. and Group B markets less than 500. Shell Canada.are influenced not by one. the gross marketing 1 Although White Rock is clearly not a major centre by itself.0001.. or “rack to retail” sector. Suncor Inc. To this end. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences.Each market was classified according to regional affiliation (BC/Prairie. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. In all. it was essential to obtain data not normally available through existing public sources. retail pump prices .

This allows for an accurate determination of net outlet revenue. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. rack price. to derive the 1995 average gross product margin for each of the study markets. a broad representation of markets was possible. by product grade. average outlet annual throughput was determined for each market. Where applicable. these were weighted by volume. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). and freight were successively removed from the pump price. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. From participant company supplied data. MJ ERVIN & ASSOCIATES 40 . rack price. and freight. 3. The variables of tax content. For each market. weighted by sales demand. 1995 average values were determined for pump price. 2 Accordingly. Where differences in gross product margin might still exist. in addition to operating cost and ancillary revenue data gathered in the study1. The gross product margin thus serves as an interim basis for comparing study markets. including some smaller centres. and the final “rationalized” gross product margin was determined for each market. a market-by-market profile of outlet income is presented. Using the derived gross product margins and volumes for each market. average pump prices are higher than actual average regular gasoline prices. Finally. tax content. Group B (smaller market) and 19-market study averages. to arrive at “blended” values2. 2. 1 Although outlet cost and ancillary revenue data was not available for all markets. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. as the “blended” price includes other product grades.margin is stripped of its freight component. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1.

or consolidated net incomes. grade differentials were based on known differentials of nearby markets. a recognized source of data on world crude oil and petroleum markets and prices..7 million. Interpretation of Data In some smaller centres. freight. From participant company data.. so that on a cents-per-litre basis. The derived weighted average values of pump price. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. and supplier profit. MJ ERVIN & ASSOCIATES 41 . This value was then applied to the gross product margin to determine average outlet petroleum revenue. Wholesale refined product prices used in this study are therefore likely to be overstated. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. and outlet operating costs were deducted from total revenue. Supplier Overhead costs. perhaps by 1 to 2 cents per litre. encompassing a significant portion of the entire Canadian market. This variation is constant across all nineteen markets however. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. and accordingly represent a broad spectrum of consumers and marketers. While clear. as described on page 10.. Bloomberg rack price values were used as the assumed wholesale price. marketing margin. the effect on the “blended price” is small. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. petroleum revenues. Unlike retail pump prices however. but they are relatively minor. objective data exist for both of these values. .. and from one brand to another. these 19 markets represent a combined population base of 8. it is important to understand that the use of rack price in this analysis has certain implications. etc.. represent a broad range of markets. and gross product margins are therefore likely to be understated. average revenues from ancillary services were added. also considering that RUL constitutes the majority of product. 7. 5. A dollar-per-outlet estimate of these elements was made.4.to determine average consolidated net revenue per outlet. These differentials do vary from one market to another. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. many wholesale petroleum purchases are made at less than the “posted” rack price. accurate comparisons are possible. and therefore where assumptions were made. product margins. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. 6. In referring to marketing margins. including relatively smaller ones such as Sioux Lookout or Gaspé. When these margins are applied to outlet throughputs as in step 4 above. Also.

broken into tax and extax components. Tax Figure 19 shows posted pump prices for the study markets. The data also shows that typically. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices.64 cents per litre in pump price.38 cents per litre in ex-tax pump price. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. and based on objective. there is little to suggest why such a high variance exists. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. while lower prices tended to prevail in major centres. The first of these variables to be examined is tax. The study data suggests that variations in tax rates account for a significant part of pump price differences.8 cent difference in pump price 1 See footnote at Appendix II. but a variance of only 12. table J for an explanation of how variance is derived. accurate. independently gathered data. A 6. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. The data shows a statistical pump price variance of over 17 cents per litre within this study group. MJ ERVIN & ASSOCIATES 42 .Rack prices used in this study are nevertheless market-driven. The 19-market study group exhibited a statistical variance1 of 17. higher priced markets are associated with smaller population centres.

when examined on an ex-tax basis. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. additional elements of the revenue stream must be further isolated. In all study markets. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry.less than one-half cent per litre. it is therefore more useful to use ex-tax pump prices when comparing any two markets. Upstream and Gross Refiner Margins Although the deduction of tax content is useful.tax. while taxation between provinces is more pronounced . accounting for roughly half of the average retail price.between Calgary and Vancouver for example. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. was less than three cents. Figure 19: Pump Price . namely the upstream industry and refiner sector. taxes were a significant element of pump price. or when examining historical price trends. MJ ERVIN & ASSOCIATES 43 . This eliminates any effect that tax variability may have. The data shows that taxation between markets within the same province varies little.while all markets are subject to the same rate of federal excise tax and GST1. but the variance is minimal . GST content can vary by market. thus providing a better basis for comparison. as described in part A. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. provincial tax rates can vary greatly. Montreal).75 cents per litre (Vancouver. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. 1 Due to pump price differences.

as this would cause rack buyers to bring product in from the lower-priced region . but ultimately. if a clear understanding is to be achieved. as is examined below. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. Freight costs are additional. reflecting the reality that at the rack level of competition. When rack price is deducted from the ex-tax pump price. the rack price is set at the rack point (Winnipeg. differ little from those of major centres. the validity of analyzing gross marketing margins in isolation might be raised. rack and pump prices. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB.assuming transport costs did not outweigh the price difference. are clearly delineated by market-driven crude. rack price) and gross marketing margin elements. one region cannot maintain rack prices at a higher level than another. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. the rack price is equivalent to the upstream margin plus the refiner’s margin. MJ ERVIN & ASSOCIATES Cents per litre 44 . reflecting some differences in refinery crude acquisition costs. Furthermore. This is due to the fact that for any market. in the case of Thompson). The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. To address this. it should be restated that each of these sectors. and therefore are best analyzed separately. and their respective margins.

Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. in fact. and therefore a significant pump price factor. generally smaller markets. with their component freight costs. one final outside variable must be isolated: that of product freight. For markets which are also established as rack points. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. it is therefore important to eliminate the freight variable from the gross marketing margin. Figure 21 shows a study market comparison of gross marketing margins. as low as 0.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. the data shows that freight is often a significant part of the gross marketing margin. Two of the study markets had freight costs in excess of 3. remote population centres.16 cents per litre (gross marketing margin) to 7. this freight cost is almost negligible. it is essentially a “non-core” business. Although freight operations are often an integral part of many petroleum marketing operations. resulting in comparative gross product margins. particularly in comparisons of major urban markets to small.3 cents per litre. Before using this as an analytical tool however.49 cents per litre (gross product margin). MJ ERVIN & ASSOCIATES 45 . Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. To provide a comparative view of the marketing dynamics within the study group. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. For other.0 cents per litre.

22 cents per litre Smaller markets showed a wider variance in gross product margin . at 3.42 cents per litre. Group A (larger population) markets averaged 5. In referring to marketing margins. was the lowest.68 cents per litre. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.68 cents per litre1.a variance of only 2.06 cents per litre. Gaspé. petroleum revenues. A 7. was the highest of the study group. while Group B markets averaged 7.5 cents per litre average Gross Product Margin cited in Part B. as the 3.the gross revenue available to the petroleum marketing sector for its operations. 1995 gross product margin averaged 5. while Toronto. product margins. to the resultant retail gross product margin . The study revealed that: • • Retail gross product margins differ very little between major urban markets . Bloomberg rack price values were used as the assumed wholesale price. or consolidated net incomes. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.17 cents per litre.5 cent per litre average relates to regular gasoline in major markets. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. or between any two regions.5 cents).Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.6 cents) to the variance in their component gross product margins (7. MJ ERVIN & ASSOCIATES 46 . For all study markets.95 cents per litre.6. at 14.5 cent variance in gross product margin is still significant however. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.

it would likely be so unprofitable as to be un-viable.000. for example. an examination of related outlet throughput volumes is necessary. If these two factors are related to each other as they are in Figure 24.000 litres per year (Toronto).differences between markets.000. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. ranging from under 700. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000 litres per year (Sioux Lookout) to over 5.000. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.1 cents per litre in Toronto. vs. a wide range of variability still exists between markets in the study group .000 2. 3. sold significantly less than 5 million litres of petroleum per year.000. if any retail gasoline outlet located in the Toronto area for example.000 5. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000 1.000.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. once isolating retail gross product margin from all of the “outside” pump price factors.000 4.000 Litres 3.14.000. A wide range of volume performance is evident. Figure 23: Average Annual Throughput per Outlet 6. Indeed.2 cents per litre in Gaspé.

000 6.95 cents).962 R2 = 0. while those with high Gross Product Margins tend to have low outlet throughputs. Smaller markets perform as competitively as larger centres.000 2. all market groups (BC/Prairie.Figure 24: Outlet Volume vs. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.7 million respectively.000. With few exceptions.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000.that is. On average however.000 3.6634Ln(x) + 76. it follows that higher gross product margins will be the consequence. the Group A market outlets had roughly 50% more throughput than Group B outlets . and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.4 million litres annually. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. they remain essentially the same regardless of volume changes .42 cents) than smaller (Group B) population centres (7.000 5. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.000.6624 1.000. Ontario. compared to 2. If all outlets in a given market experience generally low throughputs. Although MJ ERVIN & ASSOCIATES 48 .000. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. Regionally. As most outlet operating cost are fixed in nature . not of poor competition.000.000 Volume (litres) 4.

and the resultant consolidated net revenue.000. supplement their incomes with other revenues. outlet-based view of retail markets. Figure 25: Outlet / Volume Relationship .000 5. however.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. this is likely due to the higher incidence of Group B study markets within this region. which for the study group. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). and supplier MJ ERVIN & ASSOCIATES 49 . and ultimately shows that very little difference in competitiveness exists between any two markets. in addition to petroleum sales.000. such as convenience stores. and must be examined. two additional factors are introduced: ancillary revenue and outlet operating costs.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. which. while operating costs are those costs which are directly incurred in the operation of the retail facility.000. These additional factors clearly have an effect on the relative competitiveness of retail markets. averaged $69. Consolidated Net Revenue per Outlet To create a complete.716 .000 2.000. and auto service. and incur many expenses in the course of their commerce. Gross product margin.the revenue available for dealer income. product cost.000. ancillary sales. is only a measure of petroleum revenue per litre. supplier overhead costs. competitiveness occurs between retail outlets. It represents the residual revenue which is available to the dealer and to the supplier.000. Figure 26 summarizes total outlet petroleum sales. less outlet costs. In reality.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. Ancillary revenues are those derived from non-petroleum sales sources.000 6. car wash.000 4.000 3. as described below.

reduced pump prices.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000) $(200. An examination of these component elements reveals a significant finding: that for most markets. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000 vs. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. Most markets showed relatively similar net revenues (see Appendix II.Group B outlets were not as profitable as these revenue values might suggest. MJ ERVIN & ASSOCIATES 50 . petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. Finding 19: Based on published rack prices.000) $(300. As described above.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist.000) $(350.000) $(150.$154.profits. $60.000 $250. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . causing the weighted average for Quebec / Atlantic to be depressed). these ancillary operations contributed to a lower product margin and consequently. In effect.000 $150. A discussion of the ultimate distribution of this revenue is useful.000) $(100.000) $(250. Costs. Figure 26: Outlet Revenues. as explained below. and his personal labour investment.000 $50. Table K). petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000 per year respectively .000 $200. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000 $100. Income BC/PR $300. which reflects his investment in the outlet.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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contributing to a higher than average pump price. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.658.38 ¢ 7. this market has access to numerous refiners along the Pacific coast through marine supply.ex tax Canada Average .89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.968 litres 7. Vancouver collects a 4 cent per litre municipal tax. ranking 11th. while average throughput ranked 4th.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.542. Low consolidated net revenues may have contributed to the higher margin.000 barrel per day plant located in the greater Vancouver area. Geographic / Supply / Freight cost considerations: As a port city. The somewhat high margin placed this market slightly above. Vancouver provides several perspectives into retail marketing.745 18 446 2. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. and with access to wholesale product by several means. Influence of other markets: Although relatively close to the US border. Vancouver is also a terminal for a refined products pipeline from Edmonton. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. Figure 28: Vancouver . a 60.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . net outlet revenues were less than those of other major centres.Vancouver population # of brands # of outlets outlets per 10. as described below.98 ¢ 0.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . and also has local refining capacity. Overall. but well within a cluster of markets with similar throughputs. This may explain the somewhat elevated gross product margin in this market.000 1.

53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. and retail gross product margin was less than that of markets with a similar population base.630 litres 7. or competitive dynamics. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver.315 4 8 4. MJ ERVIN & ASSOCIATES 55 .90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. White Rock’s margin was typical of markets with similar outlet throughputs. In all respects. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. Freight costs were accordingly low compared to other small markets in this study. thus providing some unique characteristics for the market study. Like Vancouver.White Rock population # of brands # of outlets outlets per 10. but less than most markets with a small population base. This suggests that. Influence of other markets: Although this market is a border-crossing community. This market is close to its usual rack point.45 ¢ 7. Price history / Taxation: Although no specific data is available. White Rock is essentially part of a major market due to its proximity to Vancouver. Vancouver.98 ¢ 0. Average outlet throughputs were relatively high. due to its proximity to one.604. prices in this market have historically mirrored those of Vancouver. the study data found little to suggest a material effect upon representation. Despite its relatively small size. Geographic / Supply / Freight cost considerations:. adjacent to the United States border. this market is subject to a 4 cent per litre municipal tax.000 16. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. gasoline “cross-border shopping” is less pronounced than might be expected. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. the White Rock retail gasoline market displayed the same attributes as a major urban market. at least in this market. This is likely due to the fact that unlike many smaller markets. prices.

000 710. Product is usually sourced from Edmonton refineries via pipeline.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Calgary pump prices are very close to the Canadian average. Price history / Taxation: As the figure below shows. which was one reason for selecting Calgary as a study market.719 litres 6.Calgary population # of brands # of outlets outlets per 10. Consolidated net revenue: was typical of other major markets in the study group.827.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price .ex tax Canada Average . Calgary is of sufficient size to support a viable rack market. Other considerations: Of the markets studied. Indeed. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Calgary had the third highest number of retail brands.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .47 ¢ 0. creating some competitive pressures (see Nanton). on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Some smaller markets in the vicinity have occasionally priced below Calgary. pump prices in this market have historically been well below the Canadian 10-city average. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Rack-to-outlet freight costs are among the lowest in the study group.675 27 313 4. indicative of a strong competitive climate. Influence of other markets: Calgary is fairly remote from US and other major markets.24 ¢ 6. Figure 29: Calgary .

180 15 86 4. Consolidated net revenue: was typical of other similar markets. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Influence of other markets: Like Calgary. and is therefore a recognized rack pricing point. Since then.ex tax Canada Average . Since 1993.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. this market is removed from other significant markets.794 litres 7.Regina population # of brands # of outlets outlets per 10. Ex-tax prices are also above average. Although no supporting data is available.21 ¢ 7. and this market is now more typical of other large population centres. and therefore experiences no particular influences from any other major market. margins and throughputs were typical of other markets with a similar population base. price volatility has eased. it is likely that this reflected a surplus of wholesale inventory within the local market or region.50 ¢ 0. supply/demand is likely more balanced.089. Figure 30: Regina . Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group.000 179. Regina was of some interest as a study market. This is partly due to provincial taxation levels. and a history of volatile pump prices. which are among the highest in Canada.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.

although. Figure 31: Winnipeg . This may reflect a lower than average Consolidated Net Income. this market has exhibited relatively stable pricing.Winnipeg population # of brands # of outlets outlets per 10. it is an established rack price point.ex tax Canada Average .06 ¢ 0. Consolidated net revenue: No ancillary or outlet cost data was available for this market.265.790 17 261 4.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. prices have tended to stay somewhat above the Canadian average.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Since then.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. possibly due to modest ancillary revenue.000 616. and has remained very close to the Canadian 10-city average. probably related to a regional surplus of wholesale inventory (see Regina). although there is no study data to support this. like most markets of this population density. and therefore experiences no particular influences from any other major market. On an ex-tax basis. Influence of other markets: Like Calgary. though somewhat higher than average ex-tax pump prices. Price history / Taxation: In the early 1990’s this market experienced some price war activity.217 litres 8.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price .22 ¢ 7. this market is removed from other significant markets.

the Nanton retail gasoline market displayed the same price attributes as a major urban market. due to its proximity to one. in terms of expected petroleum revenues.Nanton. Nanton appeared to benchmark its pump prices to those of Calgary. and perhaps healthy ancillary sales associated with highway traffic. more isolated small-town markets. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Influence of other markets:. MJ ERVIN & ASSOCIATES 59 . Nanton had a high number of per capita outlets . placing Nanton well below the expected margin.91 ¢ 0.585 4 5 31. a feature not available to other. Price history / Taxation: In order to attract market share beyond simply the local population.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. although not as low as expected. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. Due to its highway location and its proximity to Calgary. the retail gasoline market in Nanton was not restricted to the local population.071. Nanton was perhaps the least viable market in the study group. Nanton has traditionally priced either at or below Calgary. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. while others experience consistently high prices.41 ¢ 5. Average outlet throughputs were relatively low. In this respect. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. in order to maintain a share of the considerable potential sales revenue that passes through this market. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Nanton had the second lowest gross product margin of the study group.the highest of the entire group . it is likely that low operating costs. Unlike many of the smaller markets in this study group.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. Consolidated net revenue: No Ancillary or cost data was available. this market has a relatively low freight overhead. would have an offsetting effect.000 litres 5. as Figure 24 shows.far in excess of what would be expected of a community with a population of 1. Alberta population # of brands # of outlets outlets per 10. Nanton was the smallest market in terms of population. situated on a major North-South highway to the United States Among the study group.000 1. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . While these conditions would normally result in a high gross product margin. Despite its small size.600.and a low average outlet throughput.

623 litres 12. isolated markets.715 6 8 11. nor is it influenced by. Geographic / Supply / Freight cost considerations: At 1. experiencing relatively high gross product margin and consequently.Peace River.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. further adding to overall high pump prices. high pump prices.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. this market has little or no influence upon. Peace River also experiences high freight costs. and in fact fell into a tight cluster of four other study markets. Peace River has among the highest freight cost in the study group. In contrast to Nanton. Supply is via tanker truck from Edmonton. Alberta population # of brands # of outlets outlets per 10.157. isolated markets. and was accordingly chosen as a study market. though fairly typical of many smaller. they were comparable to other markets with similar average throughputs.000 6. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. Price history / Taxation: Peace River is typical of small. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.6 ¢ 10. MJ ERVIN & ASSOCIATES 60 . other markets. and due to its isolated locale in northern Alberta. its normal rack point.45 ¢ 1.6 cents per litre. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.

Geographic / Supply / Freight cost considerations: At 3. Price history / Taxation: Thompson was typical of small. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Thompson is faced with the dilemma.02 ¢ 11. Influence of other markets: Since is not located on a major inter-uban thoroughfare. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. Supply is via tanker truck from Winnipeg.02 cents per litre. they were comparable to other markets with similar average throughputs. MJ ERVIN & ASSOCIATES 61 . isolated markets. outlet costs were also modest typical of most smaller markets. Although outlets in Thompson appear to be as competitive as those of any other study market. Manitoba population # of brands # of outlets outlets per 10. Other considerations: Like other small markets.014. the community of Thompson clearly falls into the category of a small. this market has little or no influence upon. a significant portion of which would likely be distributed towards supplier overhead costs.520 litres 14. high pump prices. It also experienced high freight costs. These factors resulted in relatively strong per-outlet net revenues. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. and reduced pump prices.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. nor is it influenced by. This however. and due to its isolated locale in northern Manitoba. and in fact fell into a tight cluster of four other study markets. its usual rack point.975 5 6 4. Thompson is among the highest freight costs in the study group. Consolidated net revenue: Low outlet throughputs were offset by higher margins. other markets. resulting in per-outlet petroleum revenues which were quite typical of many markets. Although ancillary revenues were the smallest of the study group. experiencing relatively high gross product margin and consequently.1 ¢ 3. further adding to overall high pump prices.000 14. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. thereby creating the potential for narrower margins.Thompson. remote market.

as evidenced by an exceptionally low gross product margin.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . In addition. This is likely offset by high operating costs. Figure 32: Toronto .3 ¢ 3. it is likely that outlet ancillary revenues are among the highest in the country.06 cents per litre. it had the second highest brand variety of the study group.275. With an average “blended” gross product margin of only 3. thus there exists a climate of robust competition.775 30 546 2.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . and is also relatively close to wholesale supply sources in the US. and first in average throughput per outlet. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. similar to that of Montreal. this market was consistently less than the 10-city average. and a resultant low consolidated net revenue. stretching from Pickering to Buffalo. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. It consequently has a low freight component.000 2.098. Consolidated net revenue: Although no study data was available for this market. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres.extax Toronto Posted Price .06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. Within this region are thousands of retail outlets. Influence of other markets: This market is continuously linked with several other major retail markets.478 litres 3. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. On an ex-tax basis however.Toronto population # of brands # of outlets outlets per 10. New York. this market ranked first in a number of measures: lowest gross product margin.36 ¢ 0. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. least number of outlets per capita.

Other considerations: While pump prices in this market were somewhat higher than in Toronto. Influence of other markets: Although Ottawa is the only major market in the immediate area.000 678. ancillary revenue was slightly lower than average. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. freight costs within this market were quite low.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . slightly lower that expected. and close to the Canadian 10-city average. Consolidated net revenue: was low.29 ¢ 5. some of which have on occasion priced below Ottawa (see Nanton and Calgary). Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin.145 19 209 3.97 ¢ 0. rural markets co-exist in this area. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. and operating costs were higher than most. Figure 33: Ottawa .004.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . exhibiting all of the characteristics of robust competition.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. Although petroleum revenues were typical of major markets.ex tax Canada Average . Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis.Ottawa population # of brands # of outlets outlets per 10. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. in fact.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets.948 litres 5. several smaller.

Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.550 litres 8. average throughputs were modest. this Canadian market has some difficulty in remaining both competitive and viable. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. and between 5 to 8 cent per litre in gross product margin.465.475 10 24 2.22 ¢ 7. and accordingly.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. yet with some potential for cross-border retail competition.000 81. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Influence of other markets: This market is close to a US border market. Freight costs are therefore high. Sault Ste Marie is a sizable market. a product of relatively strong net petroleum revenues combined with lower than average operating costs.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. a consequence of the transport distance from the rack point. somewhat isolated. This would suggest that a significant market share is being lost across the US border.Sault Ste Marie population # of brands # of outlets outlets per 10.73 ¢ 1. MJ ERVIN & ASSOCIATES 64 . partly due to higher freight costs. Pump prices in this market were thus typical of any market with similar throughput characteristics.

was much less than expected for a market of this size. Consolidated net revenue: No data was available for this market. with little or no influence from other retail gasoline markets.2 ¢ 11. so that virtually all sales volume represents local demand only. Freight costs are therefore high. although high. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. It therefore presents some unique characteristics for the market study. and outlet throughputs of any market studied.96 ¢ 3. Sioux Lookout is well-removed from any major highway.Sioux Lookout population # of brands # of outlets outlets per 10. Influence of other markets: This is clearly an isolated market. one-seventh the average throughput in Toronto. This would suggest that.000 3.310 3 3 9.006 litres in 1995. in fact the second highest in the study group. this market experiences a high degree of price competition. This is a major factor in the high cost of gasoline in this market. MJ ERVIN & ASSOCIATES 65 . largely due to higher freight costs. An average outlet in Sioux Lookout pumped only 694.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. brands.066 litres 14. and had the least number of outlets. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. despite its high prices.

Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. an additional tax of 1. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. It therefore represents a highly competitive rack market. pump prices in this market have a tendency to be volatile.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. a function of a competitive rack market and an excess of retail outlets competing for market share.5 cents per litre was introduced into the Montreal area). this market ranks first of the study group in terms of brand variety. This market had the highest tax content of the study group due to high provincial tax rates (in 1996.Montreal population # of brands # of outlets outlets per 10.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. thus promoting a competitive climate.43 ¢ 0.000 1.775. combined with low petroleum revenues and high operating costs.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . and is also relatively close to wholesale supply sources in the US. this market interacts with several other markets in the region. placed Montreal lowest of all study markets in terms of consolidated net revenue.extax Montreal Posted Price .394. On an ex-tax basis however. Price history / Taxation: As the figure shows. With 32 competing brands.144 litres 5. Montreal was included in the selected market study. with resultant low average outlet throughputs. This. Influence of other markets: Like Toronto. Figure 34: Montreal .3 ¢ 5.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 .870 32 866 4. pump prices in Montreal have generally been at or below the 10-city average for major markets.

for example).289 litres 12. both pump and ex-tax prices in this market were higher than average.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Margin/Throughput relationship (Figure 24): Outlet throughputs.08 ¢ 11. this market has little potential as a rack market. by tank truck.Chicoutimi population # of brands # of outlets outlets per 10. Freight costs are therefore somewhat high. but is quite isolated from any other markets. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. a partial factor in the high cost of gasoline in this market. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.000 120. Consolidated net revenue: was average among the study group. yet is geographically quite isolated. In the case of Chicoutimi.28 ¢ 1. were quite typical of markets with similar populations. MJ ERVIN & ASSOCIATES 67 . Nevertheless. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. within a cluster of other markets with similar attributes. this amounted to a reduction of 5. but as the figure shows. Gross product margin was accordingly high. Chicoutimi is normally supplied from the Quebec city rack.250. although low.605 14 97 8.75 cents per litre.

88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. in fact the highest in the study group. in the case. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group.50 ¢ 3.000 16. by tank truck. a key factor contributing to its 14. with little or no influence from other retail gasoline markets.75 cents per litre. Influence of other markets: This is clearly an isolated market. Gaspé is well-removed from any major highway. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. ancillary revenues would likely be modest.17 gross product margin the highest of the study group.Gaspé population # of brands # of outlets outlets per 10. amounting to a reduction of 5.900 litres 17. Freight costs are therefore high. Nevertheless. Consolidated net revenue: No data was available for this market. both pump and extax prices in this market were higher than average. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.400 6 13 4.33 ¢ 14. Nevertheless. located at a considerable distance from its rack source of supply. MJ ERVIN & ASSOCIATES 68 . this margin was only slightly higher than expected for a market with these throughput attributes. Although operating costs are likely to be low in a small market like Gaspé. so that virtually all sales volume represents local demand only.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. a product of high freight costs and gross product margins. This is a major factor in the high cost of gasoline in this market.

reflected in the high ex-tax pump price. and therefore. and is capable of shipping and receiving wholesale product through marine facilities. ex-tax prices were relatively high.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. this market fell within the expected range of gross product margins as a function of outlet throughput. Nevertheless. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. Average gross product margin was consequently high.694 litres 9.095.ex tax Canada Average . posted pump prices in the Saint John market have closely followed the 10-city average. freight costs in this market are low. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.000 74. it is an established rack point. Since provincial taxes are among the lowest in the country. which for Saint John. Accordingly. Saint John presents some unique characteristics for the market study. with or without a local refinery. retail pump prices are ultimately a reflection of rack prices.extax MJ ERVIN & ASSOCIATES 69 . do not differ markedly from any other rack point in the study group. the Saint John retail market is relatively isolated from other retail markets of any significance.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.27 ¢ 9.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. In fact. Price history / Taxation: Historically. Figure 35: Saint John NB .79 ¢ 0.Saint John NB population # of brands # of outlets outlets per 10. resulting in lower than expected average outlet throughputs. That a major refinery resides in this market might suggest that these prices should be among the least in the country. Consolidated net revenue: was average for the study group.970 9 56 7.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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........................................... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences................... ................................................ given the possibility of discounts from posted rack prices and potentially lower overhead costs.......... and likely a negative impact on consumers........... 48 Finding 19: Based on published rack prices............................ 33 Finding 13: From 1991 to 1996...... In effect............. .... .. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre................... 50 Finding 20: For the 481 individual outlets studied.... the residual represented a net loss to the supplier....... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US............. 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes............................... The viability of the Canadian retail gasoline sector as a whole may be somewhat better.. 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs........... which ensures a competitive product price for buyer and seller alike......... 71 MJ ERVIN & ASSOCIATES 73 ..... the profitability of the 481 outlets studied appears only marginal...................... ............................. 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels...... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences....................................... remote population centres.... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads..................... residuals for outlets not studied may be better............... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements................................... while those with high Gross Product Margins tend to have low outlet throughputs.... which in turn........... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre......... a feature of most market-regulated commerce........................ reduced pump prices........ The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations................. petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied.............................. ................ are principally a reflection of changes in the underlying price of crude oil......Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products...........51 Finding 21: Based on published rack prices and the individual outlet data... ............ when compared on an ex-tax basis.............. 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness.............................. particularly in comparisons of major urban markets to small.......... these ancillary operations contributed to a lower product margin and consequently....

a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). exhibited a diminishing trend (Finding 13). is mistaken. and promotions are the other three). In comparing several diverse markets. when measured in constant and nominal dollars. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This has not simply been a result of a decline in underlying raw materials costs. over the long term. in comparing Canada average (city) pump prices to those of the United States. The resultant margins. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . On a national level. As described in this study however. when taxes were excluded (Finding 14). The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. price is but one of four competitiveness “tools” available to marketers (product. Virtually all of the competitiveness indicators examined in this study relate to price. place. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. 1. 2. Although an objective measure of competitiveness is elusive. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. Canadian prices have been at or below US prices in recent years. The study presents such a model. each with unique dynamics. was observed (Finding 10). by all objective measures available to this study. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). Rack and pump prices are determined in competitive marketplaces. the very margins within which this industry operates has. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. was shown to be strongly competitive: • A long-term decline in pump prices. The Canadian retail petroleum products industry.

or 6 percent (Finding 6) of the 1996 average regular pump price. 3. measured against the average outlet throughput for that market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. are thus a reflection of the state of product supply. but given its magnitude. but also rack prices and outlet performance. since this is the effective range of consumer choice.even negative values. refiner margins accounted for 5. Due to the localized nature of competition in the retail gasoline marketing sector. these markets have managed to sustain a certain level of viability and competitiveness. This would entail the tracking of not only pump price. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). The latter two can vary considerably from one market to another. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. and accordingly. and are a predominant cause of inter-regional pump price differences (Finding 16). and product margins accounted for 3. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. provincial. Dealers were shown to have a variety of relationships with their supplier. experienced higher than average pump prices. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). MJ ERVIN & ASSOCIATES 75 . Petroleum product taxes are levied at the federal. demand and other competitive factors existing at the time. municipal levels of government. taxation differences between Canadian and US markets. and in some markets. it is important to understand that. The demonstrated exception to this is in markets directly adjacent to nearby US markets. but even in such cases. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. when the “outside” factors (tax. vary considerably from one population centre to another. presents a competitive disadvantage to Canadian marketers. By contrast. crude costs accounted for roughly 34 percent (Finding 2).3 cents or 9 percent (Finding 5). and do. well over half of all outlets in Canada operate as lessees or independents. retail petroleum markets are considered local (municipal) in scope. rack price and freight cost. This implies that the competitive dynamics pertaining to these retail markets can. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. particularly smaller ones.5 cents. for example) were rationalized. and in some markets. While some markets. an exercise that consumers are unlikely to engage in. generally do not serve as competitiveness inhibitors. or even between Canadian markets with differing tax structures. Taxation is a significant factor in the price of retail gasoline. taxation as an element of public policy is an area worthy of additional research. In applying such a model to the retail petroleum marketing industry.

In fact. on the basis of price fluctuation alone. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. showed a close relationship to underlying crude prices (Finding 11). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. predictable seasonal pattern. Retail pump price changes showed a close relationship to underlying rack prices. a price-stable market. Retail pump prices showed a corresponding seasonal pattern. Pump price fluctuations can be an indicator of competition in the marketplace. and a loss in the case of urban markets. 4. The pump price/margin model shows that in 1996. is available to provide for all retail marketing operations including outlet costs. exhibited competitive traits typical of any of the study markets. the Canadian retail marketing sector realized an average gross margin of 3. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. Sioux Lookout. While price wars are undoubtedly an indicator of competitiveness. when examined on the margin-volume model. constitute a small portion of the retail pump price. MJ ERVIN & ASSOCIATES 76 . While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). and more price-stable markets such as Sioux Lookout.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. which in turn is the principal driver of ex-tax pump prices. second only to the United States. which represent the majority of Canada’s population base. Viewed from this perspective. in a highly distinct. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. reflecting consumer demand behavior (Finding 15). Rack prices were shown to not significantly differ between major centres. the absence of price war activity does not imply a lack of competitiveness. This margin represents gross revenue (after wholesale product and freight cost) which. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). 5. supplier costs and profitability. which in turn. dealer income. on a per litre basis. incorporated with ancillary revenues and outlet costs. This consolidated outlet revenue. when distributed these three ways (Finding 20). Retail gasoline marketing revenues. Demand for gasoline was shown to vary significantly according to the time of year. fluctuating prices are a strong competitiveness indicator (Finding 7).

Since 1991. despite the predisposition of many observers to use them as such. this industry sector would have realized profits of unprecedented proportions. and the marketing sector in particular. several competitive strategies. and in turn. This trend has both resulted in.6. despite increases in tax content and crude costs (Finding 12). pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. these findings clearly show that pump price increases are ultimately linked not to increased profits. Declining refiner and marketing margins. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. While these economics might appear to place this industry in a position of poor viability. 7. crude costs. Thus. assuming all other costs were unchanged. both of which are beyond the direct influence of Canada’s oil companies. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. intense competitive pressures in the downstream industry in general. have caused. if Canadian average pump prices were only one cent higher than they were in 1995. and has been a result of. based upon an assumed posted rack price. and have resulted from. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. serve as perhaps the most significant indicators of competitiveness in the downstream industry. including: • • • improving production efficiency through refinery plant rationalizations (closures). and the associated industry initiatives which are ongoing in nature. Industry profitability is extremely sensitive to very small changes in pump price. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. Both the downward trend in margins. MJ ERVIN & ASSOCIATES 77 . Nevertheless. Also. not excessive profits. but to increases in underlying rack prices. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Thus. not price. most outlets used in the 19-market study represent major integrated oil companies. Indeed. Also. in the long term these fluctuations are likely more reflective of market restorations.

other factors exist which contribute to relatively high margins and prices. 9.5 million fewer litres of gasoline than a group A (major centre) station. • • At first glance. Outlet throughput is a key determinant of inter-market pump price differences. reduce pump prices. had petroleum margins which were commensurate with average outlet throughput for that market. This created some economic pressure to sell product at a higher pump price. MJ ERVIN & ASSOCIATES 78 . This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. which could actually inhibit competition. poor outlet throughputs were generally the predominant factor. reducing the number of outlets may also reduce the number of competitors. A wide range of petroleum gross product margins were evident within the 19market study group. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). That such a relationship should exist was not surprising. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). The costs of most consumer goods in smaller.8. average pump prices were relatively high. Thus. When plotted against the margin-volume model. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. When these margins were compared to their corresponding outlet throughputs. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. thereby improving petroleum volumes and ancillary revenues at the remaining sites. isolated markets face particular challenges: although found to be highly competitive. regardless of size. the solution would be to encourage some dealers to exit the market. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. and this study showed that gasoline prices were no exception. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. according to the margin-volume model. Smaller. there are three points to consider: • In very small markets. which should. While competitiveness in most smaller markets was shown to be as active as in larger centres. it would seem that if local government in smaller markets were interested in lowering pump prices. although this study provides comprehensive evidence of this. most markets. Although some smaller markets appeared to have higher gross product margins than larger markets. virtually all of the 19 study markets exhibited similar levels of competition. more isolated markets are generally higher than in larger centres. In suggesting this approach however.

Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and the perceived effect on their markets. the Halifax market. Convenience store. The federal Competition Bureau for example. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. 11. MJ ERVIN & ASSOCIATES 79 . and as such. car wash. 10.• A full-serve retail gasoline outlet typically employs 3-5 staff. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. is both the cause and consequence of increased activity in ancillary operations. depressed petroleum revenues below that of outlet operating costs. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). the degree of price competition in the retail petroleum has in effect. Charlottetown. Also. The historical record is clear however: since deregulating pump prices. Retail ancillary operations are a critical element of petroleum price competition. under the current PEI regulatory structure. is viewed as an agency which exists to the benefit of industry and consumer alike. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). As these findings show. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. are an acceptable limitation on pure competition (Finding 8). is well beyond the scope of this study. many national and local environmental regulations exist for good cause. characterized by narrow product margins and relatively flat pump prices. in order to build upon the findings in this study towards a full understanding of the dynamics at work. and the traditional automotive service bay. and likely others in Nova Scotia. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. The loss of employment represented by a station closure may be of some concern to smaller communities. This competition then. and in turn. has seen a decline in pump prices relative to other Canadian markets. as marketers find even more innovative ways to attract market share. will likely preserve a highly competitive petroleum market. does not appear to benefit in consumer terms. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results.

1. in a simple format designed for consumers and legislators. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. 2. A regular comprehensive competitiveness evaluation. direct regulatory interventions may have an adverse effect on competitiveness. Public perception measurement. Develop cooperative industry research into marketing sector competitiveness issues. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. as it does in the Canadian petroleum marketing sector. that where a healthy competitive climate exists. and the nature of competitiveness influences. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. This should be in the form of a quarterly summary of price trends and related measurements. Improve public understanding and awareness of competition in the petroleum marketing sector.This study proposes rather. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. petroleum marketing competitiveness. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. possibly to the detriment of the consumer. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. margins and competitiveness factors. and the converse image held in much of the public domain. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . not inhibit. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives.

using Canadian and foreign selected markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. MJ ERVIN & ASSOCIATES 81 . by industry. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. using Canadian and foreign selected markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. consumers. • • • • * * * Better understanding of this industry. and in particular. along the lines of the model used in this study. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and regulators alike. using Canadian and foreign selected markets.

Appendices MJ ERVIN & ASSOCIATES 82 .

the difference in pump price between a premium or mid-grade of gasoline vs. such as lessees. such as convenience goods. for example.the retail price of gasoline that would be displayed if all product taxes were removed.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. Usually expressed on a per-unit basis. Margin . Lessee .the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. such as a retail gasoline outlet. GST.a generic term referring to a retail outlet operator. in cents per litre.a petroleum marketer who is not involved in the refining of petroleum products. Excise Tax . Ex-tax Pump Price . Dealer .(for the purpose of this study) the cost. and commission dealers. There are several modes (see below) of dealer operation. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. These product taxes include Excise tax. generally expressed in cents per litre. municipal tax levees.Canadian Petroleum Products Institute.. etc. Major Oil Company . car wash. and therefore purchases its supply of petroleum product from an outside source..a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier.a service provided in addition to the basic retail petroleum sales operation. Integrated Oil Company .a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. currently established at 10¢ per litre. and in some regions. The ex-tax pump price is exclusive of these taxes. safety and business issues. etc. health. Independent Petroleum Marketer . Marketer . service bays. and included in the retail pump price.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. independent dealers.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. diesel. but inclusive of any corporate taxes on earnings.I Glossary of Terms Ancillary service .an organization who sells refined petroleum products to end-use consumers. lubricants. the regular unleaded pump price. of transporting petroleum product from the rack point to the final point of sale. such as a major oil company or regional refiner/marketer. Downstream . MJ ERVIN & ASSOCIATES 83 . an association of petroleum refiners and marketers. Grade Differential . CPPI . Distribution Costs . which serves as the voice of the petroleum products industry in Canada on environment. provincial pump tax.

the segment of the oil industry involved in the exploration and/or production of crude oil. commission dealer.Petroleum Communication Foundation. Supplier . or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. and independent dealer. Regional Refiner/Marketer .the point at which title to refined product is transferred from the refiner to the supplier. This may be at a refinery loading terminal. usually per month or per year. Refiner .a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces.an organization who.the type of contractual relationship between the supplier and the dealer (outlet operator). manufactures (from crude oil) a range of petroleum products suitable for consumer use. lessee. Although in theory the transfer price could be set at any arbitrary value. Rack Point .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. these can be broadly classified as company operated. In the retail gasoline sector. Throughput .the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.the wholesale price posted at the rack point. PCF . an association of upstream and downstream oil companies and related organizations.within the context of retail gasoline marketing. Transfer Price . it is usually based on the market-driven rack price.Mode . MJ ERVIN & ASSOCIATES 84 . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. the raw material from which petroleum products are manufactured. Upstream . the supplier has initial title to the petroleum product as it leaves the rack point. Rack Price . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector.

4 29.7 95.6 133.5 49.1 151.2 45.3 115.4 122.5 120.2 39. Nominal (¢/litre) (2) RUL Ex-tax Price.5 126. 62-010: Consumer Prices and Price Indexes.6 107.3 119.1 117.0 111.7 132.5 115.1 115.4 57.4 104.0 93.2 30.2 99.8 95.5 100.8 135.0 97.4 97.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.0 115.3 1989 114.3 122. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.1 146.4 110.1 103.0 32. No.7 30.5 145.7 54.0 104.2 121.7 123.8 1987 104.9 97.1 87.5 111.9 1994 130.6 51.3 19.8 132.9 1995 133.6 136.4 120.1 117.1 120.6 92.3 134.0 102.1 26.1 40.2 31.3 27.7 22.8 104.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.3 139.5 25.2 112.2 45.0 135.4 104.0 42.2 92.3 96.2 20.1 126.8 106.8 108. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.8 94.5 30.3 1992 128.8 47.1 104.4 45.2 142.1 144.0 1988 108.9 118.1 97.3 151.3 132.0 30.9 26.1 104.3 160.1 1990 119.4 134.9 155.0 1991 126. MJ ERVIN & ASSOCIATES 85 .4 27. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.3 141.1 48.4 136.5 124.3 52.6 122.4 53.4 124.9 1993 130.4 152.4 34.8 130.1 105.9 122.2 50.9 26.1 120. using a weighted (by provincial gasoline demand) 10 city average.2 133.9 108.7 124.0 19.3 40.7 96.5 112.5 94.2 127. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.2 49.8 93.8 28.7 29.3 125.3 58.7 118.9 115.6 91.2 109.1 167.3 55.0 93. Nominal (¢/litre) (2) RUL Annual Price.7 122.

7 29.1 52.0 16.5 10.5 16.9 31.9 6.4 13.7 29.3 17.1 13.5 26.8 14.2 22.9 55.8 25.8 53.9 56.2 11.7 7.2 14.1 53.0 7.4 26.2 7.6 52.1 13.1 16.9 26.0 7.3 15.7 14.1 23.3 56.0 8.9 30.2 13.3 54.3 54.1 7.0 10.5 7.0 24.7 63.6 26.4 53.2 26.2 26.2 56.7 4.1 18.9 25.9 6.9 21.6 24.6 23.3 26.4 8.6 13.3 5.2 21.8 28.3 56.7 8.7 18.5 35.4 55.8 55.5 22.6 7.0 4.9 7.1 19.5 54.9 26.9 13.0 24.9 25.0 26.2 7.2 13.3 13.3 66.6 25.4 24.0 26.6 8.1 13.9 17.0 54.2 16.8 53.3 4.5 6.9 24.3 25.7 19.2 7.9 25.6 25.2 63.8 8.1 16.5 10.3 42.4 33.1 22.4 34.5 23.4 58.8 21.4 15.0 24.2 4.4 29.8 13.6 13.5 33.5 11.9 58.5 31.7 33.7 12.6 9.8 14.9 23.4 14.4 56.6 6.1 25.8 11.2 14.2 27.7 14.9 56.8 16.1 9.9 14.4 31.0 16.6 26.7 23.9 53.3 13.7 Downstream Margin 14.5 32.5 15.4 32.7 19.Table B: Key Price / Margin History .4 26.8 23.1 7.4 26.7 15.5 14.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.9 4.0 24.1 53.0 16.9 55.8 15.7 7.3 9.8 57.0 12.3 Tax Content 23.5 56.8 26.7 39.4 7.7 24.6 54.2 65.3 23.5 26.0 9.7 6.3 57.5 30.5 27.2 27.5 5.4 31.9 22.6 26.0 5.0 15.2 41.3 14.3 13.8 30.0 24.2 23.0 28.9 6.2 27.4 30.4 14.8 55.3 13.2 16.3 26.2 13.9 23.7 32.7 34.7 29.9 53.3 15.5 Gross Marketing Margin Gross Refiner Margin 53.1 29.6 5.7 18.5 57.2 6.9 7.0 25.1 21.4 57.2 15.2 29.6 54.0 22.0 52.2 25.8 24.9 25.3 22.7 14.4 22.4 20.1 16.6 18.8 14.8 22.3 54.5 27.5 7.9 14.7 13.1 39.4 MJ ERVIN & ASSOCIATES 86 .2 23.7 14.7 4.0 20.2 8.3 12.6 28.5 23.5 23.5 25.5 28.2 6.1 17.2 24.9 11.4 9.3 13.8 8.7 25.7 31.3 22.1 23.3 58.7 14.2 12.1 18.6 4.8 33.8 23.4 13.9 23.0 13.4 12.6 54.5 19.8 26.0 26.4 24.3 24.0 25.1 22.9 25.9 8.9 7.0 33.3 6.6 23.2 13.0 16.5 14.4 14.7 28.2 5.8 14.4 14.7 4.8 29.2 7.9 9.1 23.5 8.9 54.1 24.9 15.7 7.3 6.8 21.0 7.7 58.9 4.1 16.8 9.1 5.6 20.0 24.2 25.6 21.0 24.0 14.9 12.4 21.0 55.

5 11.6 16.4 16.4 32.1 51.1 55.4 21.3 8.5 19.2 26.5 25.8 49.5 53.3 13.8 20.7 13.7 3.2 9.2 7.9 29.6 9.3 28.9 Downstream Margin 12.3 53.1 57.2 Gross Marketing Margin 4.4 25.6 4.6 15.6 17.2 25.1 Gross Refiner Margin 7.7 25.0 12.9 3.9 4.1 14.7 8.4 26.1 26.7 18.0 6.6 3.7 51.8 23.4 5.3 9.2 14.4 4.2 20.1 11.2 4.4 6.3 6.1 10.5 20.2 12.4 6.5 6.1 54.9 26.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .4 26.4 6.0 28.5 21.3 9.0 57.7 7.7 3.5 5.7 26.6 27.1 15.0 54.2 5.3 23.5 6.7 23.8 17.0 24.0 11.4 24.3 26.8 25.5 23.3 26.8 50.9 17.9 4.2 20.5 2.7 24.3 26.5 14.0 6.5 28.4 13.9 29.1 6.2 14.2 11.6 53.9 49.9 12.9 23.5 21.4 6.7 52.3 58.0 9.1 16.1 14.4 26.0 25.3 25.1 24.1 15.4 25.1 51.0 52.4 26.6 23.8 52.6 53.6 5.5 7.9 11.7 7.7 53.1 6.4 15.7 14.3 26.9 19.7 29.2 54.0 14.3 54.5 9.3 7.1 3.0 28.0 26.0 6.5 3.2 26.8 28.1 21.0 14.3 26.3 21.5 3.7 5.0 5.7 12.0 27.1 26.9 12.0 12.6 15.6 19.9 49.9 6.1 11.2 23.5 13.2 7.5 4.1 14.3 21.2 7.9 27.3 4.2 4.2 26.5 6.4 11.5 19.6 10.8 28.6 20.3 26.2 28.5 5.8 4.7 6.7 53.5 21.3 12.9 28.6 21.6 10.7 14.1 11.7 5.1 11.0 28.1 20.7 15.2 27.3 4.3 27.6 20.5 55.5 15.0 9.5 13.9 9.4 7.9 27.9 14.1 6.3 55.7 24.2 15.7 13.5 54.2 25.9 14.0 28.0 28.9 58.2 14.1 6.6 12.7 25.7 16.4 21.8 6.9 5.4 28.0 25.8 10.0 53.4 51.7 6.8 22.3 4.8 27.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.3 26.6 4.3 7.1 15.3 26.3 28.8 23.0 29.3 9.0 26.7 26.8 29.7 53.6 11.3 26.1 Tax Content 26.5 17.1 26.0 5.5 7.1 61.2 49.5 11.2 7.

748 2.287 2.878 2.779 2.279 2.8 23.677 3.767.002.325 2.141 3.202.831.771 3.114 3.589 3.070 3.874 3.443 2.085.544 3.045 2.479 2.716.411.566.430.480.202 3.022.889 3.322 2.191 2.564 2.9 22.262.Table C: Canadian Supply.1 21.682 3.044 2.130 3.869 2.270 3.510 3.254.379.439.521 2.9 17.037 2.5 27.3 24.180.782 3.8 27.765 3.998.509 3.291.651 2.373.255 3.969 2.3 22.250.2 29.609.281 2.285 2.897 3.331 2.409.475 2.193 3. Inventory.933 3.441.316.251.592 2.853.346.687.370 2.887.518.378.181.3 26.389.744.8 29.315 2.499 2.853 2.429 2.0 28.931 3.286.9 29.039.322 3.298 2.1 22.6 28.070.5 25.9 31.321.381 2.456 2.4 24.6 21.047 3.477.9 26.7 18.693 3.469 4.5 19.644 3.415 2.485 2.859 2.9 21.377.865.461 3.029 2.615 2.141.102.5 31.628 3.8 26.030.073 2.979 2.025.830.8 33.976.5 28.027 2.176 3.508.502 2.326.841 2.934.051 3.8 22.045 2.501.301.113.2 23.2 27.2 27.710.4 24.801.035 2.020 2.450 2.897 2.4 31.429 2.818.833 2.622.8 30.880 Canadian Retail Gasoline Sales (M3) 2.798.095.295.188 3.2 22.808.269 2.966.661 Canada Avg ex tax RUL pump price (¢/l) 39.703 2.000 3.672.6 24.732.600.097 2.968 3.4 32.799.720 3.890.089.268 2.938.729.132.1 23.299 2.894.140.636.294.853 3.462.823.952.599 2.333.354.152 2.886 3.883.752 2.338 3.5 30.8 21.112 2.026 2.666.366 2.619 2.637 3.0 24.532.300.437.682.802 2.133 3.0 20.970.801.232 3.131.884 2.4 21.673 2.246 2.427.773.871 2.254 2.2 24.056 3.297 2.840.9 19.630.345.199 2.281.2 20.301 2.095 2.970 3.322 2.416 2.1 16.558.047 2.661 Canadian Domestic Gasoline Sales (M3) 2.287.329 3.654.844.743 2.218.735.636.893.604 2.781.9 26.179 3.361.613 3.627 2.176 2.180 3.7 34.151.403 2.075.837.930 3.970.6 23.785.647.813 2.684 2.412 2.935 3.287 2.209.733 2.2 27.9 23.7 29.122.973.9 23. Demand.455.572 2.4 21.767.810.725.011 2.101 2.3 22.516.192.587.490 3.120.7 29.5 22.476.580 3.283.4 29.254.667 2.168 2.473.714.101.081.558.161.122 2.827 3.7 24.873.7 26.019.1 23.369.299.1 29.642.301.369 2.1 23.8 28.141.4 25.930.625 2.498.839 2.822.904.242 2.193 3.2 26.5 23.7 29.263.7 21.218 3.876.621.995.015 3.958.142.311 3.067.688.775.8 23.160 3.335 2.960.620 3.900.748.323 3.045.2 27.941 2. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.235 3.739.612 3.220.633.804 2.201.671.646 2.458.626.180 2.843.256 2.565.245.457 2.206.130 3.003.804 3.3 23.6 26.108.2 21.897.2 26.5 32.709 2.437.633 2.182 3.7 28.3 23.709 2.979 3.7 31.422.796.164.324 2.669.5 27.2 23.967 2.313 2.3 Canada Avg RUL Rack Price (¢/l) 35.932 2.8 MJ ERVIN & ASSOCIATES 88 .083.641.864 2.9 30.7 24.4 22.9 23.

660 3.638 2.8 24.692.155 2.5 21.6 20.658.864 2.806.315.4 20.671.006 3.6 20.346 2.165.382.317 2.4 26.753 3.0 25.386 3.390.9 22.198 2. demand.8 25.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.005 2.179.5 25.785.414 3.928 3.566 3.519.8 21.994 3.607.338 2.336.480 2.825.857.0 24.669 2.442 2.997 2.344 3.840 2.617 2.0 26.9 29.537.656 3.516 3.965.8 28.130 3.7 19.521 2.597 2.149.555.376.940 2.320 3.244 3.606.7 22.198.904.415 2.773.505 2.648 3.7 21.198.9 27.4 25.863.467 2.055 2.074.999 3.294 3.195.649.679.1 21.644 3.170 Canadian Retail Gasoline Sales (M3) 2.264 2.048.082.077.363.214 2.675 2.791 3.620.469.601 3.0 25.881.977.667 Canadian Domestic Gasoline Sales (M3) 3.970.5 21.649.426.123.703 3.4 26.8 20.871 3.148.222 2.324 2.250.204. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .370.889.799 2.714 2.936 3.961.219 Canada Avg ex tax RUL pump price (¢/l) 27.205 2.930.830 3.7 Canada Avg RUL Rack Price (¢/l) 20.986.483.112 3.182.068.539.614.2 25.797.5 source: Statistics Canada (production.2 25.264 2.1 24.906.717.184.261.037 3.097.984 3.796.2 26.170 3.0 26.141 2.386 3.324.593.919 2.

4 53.9 47.3 50.4 Winnipeg 49.6 50.0 58.7 65.8 54.8 45.5 60.0 52.7 65.4 56.8 56.9 44.9 54.4 61.4 46.7 54.8 51.9 52.2 62.9 51.4 55.5 58.0 61.7 51.2 65.7 62.7 50.7 57.6 52.9 61.4 52.8 48.8 56.5 47.5 57.8 52.7 53.8 57.5 56.3 49.4 63.9 59.5 59.5 57.8 64.9 56.4 61.5 51.3 48.0 62.2 54.3 48.5 Vancouver 53.7 53.7 54.9 54.8 57.4 46.5 54.2 46.5 59.6 53.9 54.5 45.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.9 55.9 56.6 48.4 46.5 58.5 49.1 56.3 42.8 53.9 52.6 59.4 52.3 54.5 58.5 59.6 54.7 54.9 54.9 51.8 59.9 50.7 62.7 49.9 56.5 55.8 53.9 47.6 44.4 55.3 51.9 52.3 61.6 47.7 White Rock Calgary 45.4 53.9 53.3 49.9 48.5 57.9 61.0 52.1 55.5 53.5 53.1 41.5 56.4 56.8 52.7 46.9 51.0 55.6 58.5 58.0 61.4 56.6 55.5 57.5 56.9 58.9 52.8 48.2 57.7 48.1 53.2 62.9 47.5 58.2 51.1 49.2 63.4 53.5 54.5 57.5 59.9 53.5 51.9 56.9 55.8 53.0 61.4 59.4 56.1 52.9 55.5 56.9 51.9 53.4 48.0 57.2 65.3 56.9 44.8 55.2 51.9 57.0 59.5 59.3 52.7 63.8 52.9 53.8 49.4 47.5 62.5 47.9 61.5 58.8 53.1 60.2 62.2 48.5 60.7 57.9 64.4 52.2 47.9 56.4 55.0 39.1 52.5 58.5 55.9 49.9 62.6 48.4 61.9 58.9 MJ ERVIN & ASSOCIATES 90 .3 54.2 62.1 49.0 62.2 50.0 48.9 53.6 48.2 50.2 46.2 51.5 59.4 55.4 56.5 57.0 Sioux Lookout 62.5 60.7 48.9 53.3 52.5 47.0 50.5 57.6 50.9 54.6 58.9 49.6 55.2 50.4 56.9 59.5 60.7 65.5 57.5 51.9 56.8 47.6 46.9 45.6 53.5 58.8 56.8 50.8 52.7 52.2 62.6 54.3 59.5 57.4 54.2 56.0 61.8 48.7 50.0 62.1 50.5 57.9 56.4 55.7 45.9 58.8 44.2 62.1 44.4 57.5 59.5 52.0 61.2 43.9 56.9 61.8 47.5 46.9 64.6 47.9 56.7 45.9 53.1 50.5 60.7 65.5 51.5 61.9 53.7 52.9 55.3 52.8 56.9 54.2 54.9 56.2 62.5 60.5 58.6 51.1 43.9 57.4 65.4 49.4 52.9 46.9 52.4 55.9 61.3 62.5 57.5 58.0 59.3 55.Table D: Pump Price History .0 61.4 57.8 52.2 55.6 47.2 61.3 52.9 53.5 45.6 49.7 65.4 54.7 51.4 58.6 62.5 57.9 53.5 56.9 52.2 59.9 53.1 55.4 58.5 58.4 52.5 59.4 54.2 58.2 Nanton Peace River Regina 49.3 50.1 55.3 52.5 51.2 54.0 61.6 46.9 64.9 52.5 53.5 50.5 52.5 61.2 46.9 61.8 48.3 55.8 59.8 50.8 56.5 58.1 44.9 47.5 59.9 64.9 54.9 58.9 58.9 62.0 54.9 63.1 59.8 41.4 50.8 56.9 56.1 49.0 46.8 Thompson 59.5 57.0 44.7 44.2 62.7 53.1 53.9 54.7 51.9 49.9 64.6 56.2 62.

3 55.7 51.9 50.0 51.1 58.5 54.6 50.4 51.3 59.7 58.9 54.3 56.5 61.4 58.1 54.8 51.2 58.8 50.2 58.5 52.5 53.9 53.6 63.9 57.5 54.7 64.2 52.1 52.3 56.5 Ottawa 58.2 49.3 52.6 56.1 57.8 50.2 56.6 61.0 55.0 51.0 48.4 53.9 64.5 56.7 56.1 55.0 50.5 64.1 54.8 57.9 55.7 56.9 61.2 52.0 48.4 54.8 52.4 57.7 52.9 57.5 53.8 63.1 53.7 57.2 51.1 54.9 56.7 52.1 53.3 55.0 54.0 60.4 57.2 60.2 61.2 57.5 63.0 50.9 55.1 55.6 52.6 58.8 57.7 54.9 55.4 57.6 53.6 50.0 60.0 61.2 54.0 56.5 54.6 56.2 55.5 64.8 55.0 56.8 53.1 58.3 51.1 61.6 59.4 55.0 57.9 49.7 56.0 57.5 61.7 54.2 49.2 Chicoutimi Gaspé Saint John 60.2 50.2 53.9 64.0 59.7 57.0 55.9 53.1 55.2 57.2 57.0 55.3 59.8 55.1 51.4 53.9 61.0 54.6 51.9 55.5 56.2 49.6 55.4 57.2 57.0 56.1 54.3 56.6 63.8 61.6 55.5 56.1 52.3 55.0 47.5 57.9 55.9 49.6 55.5 52.8 54.3 59.5 61.1 55.9 60.6 58.7 60.9 64.0 52.6 49.7 53.2 56.7 56.6 54.2 57.5 51.6 59.0 52.6 52.7 48.2 55.0 52.7 57.2 57.4 52.4 51.6 52.1 60.8 59.3 59.5 59.2 54.8 Halifax Charlottetown 60.3 54.3 53.5 67.4 58.1 58.3 52.5 54.8 47.8 61.4 53.6 53.2 58.9 55.6 58.5 57.6 54.4 54.3 58.7 51.0 59.0 50.0 55.6 55.2 55.7 59.8 54.0 61.4 57.3 55.6 52.0 57.5 55.8 49.5 53.0 47.7 56.5 51.7 49.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.4 58.3 57.3 54.2 59.2 49.6 58.6 63.2 60.8 55.0 60.4 53.5 54.8 55.9 55.6 54.8 53.9 51.0 55.7 59.8 60.7 54.6 52.7 48.0 53.2 54.6 61.6 51.2 57.7 58.4 60.Table D: Pump Price History .3 49.3 54.5 59.4 54.1 57.6 55.9 61.8 53.9 61.6 52.3 54.8 60.1 54.9 60.6 58.3 62.7 53.4 54.1 58.1 55.9 53.9 60.2 53.9 58.3 52.4 58.8 49.6 56.5 57.6 52.3 49.1 48.2 57.9 56.0 52.2 56.0 60.6 51.3 55.8 50.5 63.8 55.7 44.0 53.8 52.4 55.7 56.1 55.9 49.1 61.2 56.4 58.7 57.2 52.2 54.1 59.9 57.1 51.8 56.8 54.7 55.2 51.1 59.2 57.9 63.1 53.4 51.2 57.2 59.6 50.1 49.5 55.4 50.6 53.6 49.9 58.6 55.8 55.1 57.4 57.7 54.5 52.3 52.7 50.2 51.4 49.5 48.3 53.3 54.0 55.6 60.1 56.0 54.1 54.6 Canada Avg 55.9 52.8 55.5 54.9 49.8 55.1 56.3 61.6 56.2 61.0 59.9 54.4 54.7 47.2 55.0 49.6 59.1 53.7 54.4 52.3 53.2 61.3 53.3 54.1 53.8 57.8 54.4 54.1 52.5 53.5 56.5 54.9 61.3 54.2 56.6 57.2 55.3 56.5 59.8 56.5 55.1 56.7 54.9 55.6 55.5 58.3 54.0 54.3 55.6 53.6 54.2 56.9 57.2 56.9 53.1 51.1 60.2 56.7 52.4 58.5 56.9 56.2 55.9 62.2 54.4 54.5 51.0 58.1 61.2 Montreal 63.2 53.5 63.9 54.4 45.5 60.0 52.0 57.4 54.6 54.9 56.3 56.5 60.9 55.5 MJ ERVIN & ASSOCIATES 91 .6 54.5 51.3 54.7 51.6 54.9 53.0 52.7 51.5 57.1 Toronto 52.3 60.0 53.7 46.5 52.9 55.7 57.3 53.5 57.

4 30.3 30.5 26.0 May-92 28.5 21.7 30.5 Sep-92 29.9 Jul-93 28.3 28.0 23.3 May-94 28.7 28.8 28.4 22.3 28.6 Sep-93 28.1 24.8 28.3 Jul-92 31.0 31.6 29.3 28.4 MJ ERVIN & ASSOCIATES 92 .8 Dec-93 26.5 Oct-92 30.4 20.4 31.4 31.7 25.7 30.3 30.4 25.8 29.4 22.9 29.3 24.0 25.9 27.1 Apr-94 29.6 23.0 26.0 26.1 27.2 29.6 26.4 28.7 Sep-94 32.4 29.5 21.7 24.7 30.6 26.3 24.7 27.1 20.1 25.8 27.3 23.6 27.3 26.7 28.4 Mar-92 28.3 29.4 27.5 26.5 Aug-94 28.6 26.0 22.7 26.2 24.4 31.8 25.0 Oct-93 28.8 23.7 26.3 Dec-95 Edmonton Regina extax extax 27.3 23.9 25.1 Feb-93 29.1 30.9 25.8 27.9 30.3 29.8 29.9 20.2 27.4 29.9 27.2 Apr-93 28.7 29.9 21.2 Dec-94 26.8 25.6 27.6 25.8 21.6 25.4 22.2 Nov-94 29.5 Jul-95 30.1 25.6 23.4 27.9 24.5 29.4 20.4 25.7 28.8 27.4 29.5 27.9 27.9 30.9 29.3 Jan-93 30.7 Sep-95 30.1 Apr-95 30.9 24.7 28.6 22.9 26.3 29.4 24.4 27.5 29.3 21.4 25.1 22.2 26.2 Jun-94 31.3 29.8 26.4 25.1 23.4 Dec-92 31.4 29.7 Mar-94 28.9 Aug-93 30.0 25.3 31.6 28.7 Aug-92 24.8 26.9 26.7 27.9 24.2 22.0 29.8 27.3 29.6 27.5 23.5 29.8 29.4 30.8 24.0 21.5 23.7 26.5 28.2 27.7 31.7 Jan-92 31.1 26.4 23.7 28.1 22.9 28.3 30.1 24.4 28.0 25.6 May-95 29.1 Mar-95 29.6 26.8 29.2 24.5 25.7 29.0 23.6 29.6 28.1 24.0 31.8 24.8 25.6 26.5 27.9 26.9 28.3 29.5 Jul-94 29.0 27.4 31.6 23.4 20.7 28.6 24.0 24.9 21.1 28.3 27.0 23.3 27.8 22.3 26.2 25.2 28.3 29.5 27.9 25.2 Nov-92 31.4 29.2 26.8 26.4 29.6 27.9 Oct-94 32.0 28.6 21.8 26.6 29.2 Nov-93 27.1 19.6 26.9 28.4 Jun-95 30.5 24.8 31.3 24.2 23.2 25.5 27.7 24.3 32.9 24.0 32.3 29.9 27.3 28.0 24.3 29.1 25.8 24.6 24.7 Jan-95 27.0 24.6 26.9 30.8 28.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.0 23.0 26.4 29.1 25.9 23.5 27.4 27.5 29.5 Nov-95 30.3 28.2 28.2 24.6 Aug-95 30.8 27.6 22.0 May-93 29.9 25.3 Feb-95 26.9 28.7 29.8 Jan-94 25.2 29.8 24.6 26.0 27.6 23.6 Jun-92 32.3 26.0 Jun-93 26.4 30.4 21.7 29.7 30.6 29.4 27.1 26.2 32.6 30.4 25.5 Oct-95 30.1 30.8 27.6 Mar-93 28.7 26.6 30.4 31.4 23.7 Winnipeg extax 27.Table E: Ex-tax Pump Price History .2 28.9 25.4 31.3 26.3 29.9 23.1 28.5 Feb-92 28.5 24.1 31.0 Apr-92 30.9 29.3 30.0 23.3 33.6 30.2 26.4 26.3 26.4 24.5 29.8 Feb-94 24.4 28.9 24.2 26.9 26.1 31.5 24.4 30.4 23.2 28.8 Toronto extax 26.9 31.4 31.2 24.7 30.1 27.

9 26.6 29.6 28.8 26.9 37.Table E: Ex-tax Pump Price History .0 36.8 32.4 33.9 27.5 31.2 25.7 32.8 26.6 22.4 25.8 27.4 36.7 27.2 22.9 24.4 33.9 30.1 32.3 26.6 27.7 23.4 26.6 26.0 28.2 26.6 34.7 32.9 32.7 28.7 Quebec extax 32.0 23.9 29.8 27.3 27.3 23.7 23.6 27.6 33.4 26.8 28.2 32.0 34.2 32.1 32.2 22.8 26.8 27.0 30.7 27.6 28.7 26.5 24.4 21.7 26.0 28.0 28.7 29.3 25.8 30.8 30.3 25.8 23.8 25.8 29.6 26.9 27.6 32.0 34.0 30.6 28.7 30.0 34.2 34.9 30.5 34.3 34.2 27.5 27.3 22.4 33.8 29.3 26.2 33.0 26.8 30.4 32.0 32.8 25.4 25.5 25.6 28.4 36.5 27.8 26.8 24.2 23.6 33.2 26.1 28.4 34.6 31.7 24.5 30.1 28.6 25.8 23.9 33.4 33.2 26.2 27.0 33.2 27.7 26.7 24.3 28.2 30.6 26.4 31.7 30.1 32.1 25.9 35.3 29.8 23.3 24.5 25.4 32.0 29.1 24.2 27.6 27.2 27.5 26.7 27.7 25.9 29.5 30.5 25.4 31.2 30.6 32.9 26.3 25.0 25.1 32.7 26.8 28.5 33.5 36.5 27.0 25.3 30.2 24.0 26.1 Montreal extax 31.1 26.7 28.8 32.8 29.6 34.4 27.3 34.0 29.8 28.7 26.7 32.7 23.9 31.2 28.8 33.3 29.2 26.0 32.3 29.5 30.9 33.8 27.6 32.1 30.3 33.8 23.5 33.0 27.3 31.2 26.6 25.2 27.6 36.1 24.7 24.7 28.4 26.1 34.2 33.3 31.3 31.2 32.6 24.8 29.8 28.7 34.2 30.5 25.0 23.1 24.3 28.0 33.2 25.9 29.7 MJ ERVIN & ASSOCIATES 93 .5 27.8 28.1 29.0 31.9 26.3 35.9 29.3 29.4 25.4 28.7 29.4 25.3 29.5 31.6 29.8 Canada Avg extax 29.6 32.6 23.3 28.3 34.2 25.5 28.2 36.8 25.4 33.7 28.7 22.9 32.0 33.9 29.0 28.0 33.6 31.2 28.8 36.0 36.9 30.6 Charlottetown extax 36.2 24.1 30.7 34.7 26.9 32.4 24.4 22.4 31.5 28.2 27.2 22.4 28.3 25.4 32.9 28.8 33.2 25.8 29.5 26.1 23.2 27.7 27.8 32.8 26.5 25.5 24.9 23.6 32.5 33.1 30.2 29.3 31.3 26.2 22.2 27.9 29.7 24.3 28.5 25.5 29.9 27.0 33.1 24.9 28.0 28.9 30.9 30.7 28.2 21.2 36.3 31.1 29.1 34.4 24.2 28.1 31.0 29.7 33.9 31.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.2 Saint John Halifax extax extax 34.3 27.8 28.6 23.6 26.1 29.9 27.5 28.0 25.0 26.6 28.6 36.5 32.8 25.1 26.8 32.1 22.3 28.9 27.5 28.9 29.9 32.7 24.1 34.

8 23.2 21.1 20.6 23.4 21.4 21.4 21.4 22.4 22.0 23.7 MJ ERVIN & ASSOCIATES 94 .7 17.8 22.0 23.8 18.6 22.1 18.9 21.0 21.4 19.9 18.3 26.1 19.6 21.9 22.3 20.6 23.5 22.1 21.0 22.7 18.5 19.2 22.2 23.2 18.8 19.8 19.4 20.1 22.5 22.2 20.3 17.8 21.5 18.5 19.7 21.6 19.9 25.3 19.7 22.8 20.2 19.8 21.2 18.1 20.3 23.9 18.8 23.9 17.1 21.0 23.4 22.8 21.2 29.6 18.7 23.2 22.5 21.3 19.8 22.9 22.4 22.5 23.6 25.8 21.8 18.9 20.1 24.2 21.3 18.6 19.5 20.1 15.0 24.4 21.4 21.7 19.4 21.6 20.3 20.0 19.3 23.6 20.1 19.1 23.3 19.3 21.9 20.2 21.4 23.1 22.1 21.4 20.5 21.4 20.8 22.6 25.3 23.8 19.0 21.3 22.7 22.4 22.3 21.1 16.1 15.7 22.7 23.8 18.4 23.4 18.8 25.8 21.2 20.5 20.2 18.3 23.4 23.7 20.5 17.7 19.2 16.7 22.4 23.0 20.5 17.6 20.8 23.Table F: Rack Prices .4 22.4 15.5 18.3 24.7 20.5 27.9 23.3 20.9 21.8 24.9 20.4 17.9 22.1 21.6 19.4 21.0 19.1 19.7 22.9 18.2 19.2 23.7 21.0 22.2 20.5 21.3 18.0 22.4 21.4 21.7 16.3 21.1 23.5 22.2 21.7 22.9 21.6 20.7 17.8 21.8 20.9 18.8 20.4 21.8 Ottawa rack Thunder Bay rack 20.8 27.9 24.0 22.1 21.5 24.0 22.5 22.9 22.2 19.5 23.2 20.0 23.4 22.5 22.7 21.3 20.7 20.5 21.4 22.6 20.5 22.1 21.0 23.2 22.3 23.2 18.1 20.2 21.8 20.8 23.1 20.7 22.2 20.4 22.6 23.4 21.1 21.3 19.2 16.5 21.9 21.4 20.9 21.4 20.6 20.1 22.7 21.1 22.3 22.8 23.8 22.7 17.4 21.3 17.2 23.0 21.7 21.8 23.9 22.1 20.3 21.6 21.7 21.3 22.0 20.1 22.9 21.2 21.8 19.2 21.2 16.3 22.1 21.6 25.1 22.8 20.7 22.0 22.6 19.8 23.0 23.8 18.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.0 19.2 20.5 21.0 21.8 20.3 23.6 23.4 22.1 22.3 23.0 21.0 21.3 24.6 19.1 20.3 21.1 23.5 20.9 22.5 24.0 23.5 26.0 23.4 22.5 21.9 23.2 23.1 Halifax rack 20.0 21.5 20.5 17.6 20.5 24.7 21.9 22.4 24.2 18.5 21.1 20.5 23.3 18.2 17.7 22.9 19.7 18.8 22.4 21.1 20.6 23.2 21.6 19.3 17.6 23.2 Quebec city Montreal rack Toronto rack rack 19.

7 24.5 21.8 19.8 22.9 21.6 23.3 21.9 19.6 25.4 21.9 21.2 21.1 23.1 23.6 19.5 23.2 24.6 23.9 23.4 21.5 21.6 20.2 22.4 21.6 22.3 24.5 20.7 23.6 25.3 19.9 21.2 24.1 16.2 23.8 22.2 20.7 21.9 23.3 21.2 22.5 23.7 18.9 24.6 21.0 24.1 23.3 23.2 22.1 23.9 21.9 20.7 22.0 24.8 24.5 23.5 24.8 22.3 23.6 21.8 23.9 22.1 23.0 18.7 21.Table F: Rack Prices .4 24.4 20.7 21.2 23.9 22.0 21.3 23.6 22.5 18.6 21.7 21.0 18.1 23.7 22.6 17.4 21.0 21.8 21.0 22.1 23.5 21.7 21.4 23.5 23.4 21.1 21.4 19.8 23.5 21.9 19.2 19.9 24.7 23.3 22.2 21.2 21.5 24.7 20.1 21.9 18.7 19.8 20.6 21.7 23.8 24.7 21.7 21.2 22.7 22.9 19.7 21.0 21.1 23.4 22.7 21.1 21.7 21.6 20.6 20.5 21.9 23.1 21.3 20.0 20.1 22.3 19.5 21.8 20.1 16.1 22.0 22.0 23.9 19.9 21.2 23.2 18.8 25.4 23.6 23.0 23.0 17.3 20.8 21.3 21.5 21.9 19.6 21.1 23.6 21.0 20.6 23.2 20.2 24.5 24.9 19.6 23.5 20.7 25.1 20.9 23.0 24.1 22.5 22.0 17.9 22.5 23.1 24.5 21.7 22.9 22.0 21.7 22.6 21.1 18.4 22.0 22.9 22.0 22.3 22.8 23.7 17.2 23.4 23.3 17.3 23.2 22.0 22.5 22.9 21.5 Canada avg rack 22.6 24.4 24.9 20.2 19.5 17.4 21.6 21.1 21.3 18.0 25.7 22.2 22.5 19.2 20.2 24.3 17.1 20.6 22.1 18.8 22.8 20.6 19.3 23.8 21.1 22.3 20.4 22.4 19.2 22.9 19.1 19.1 20.7 22.5 19.6 23.7 23.4 18.6 25.5 18.2 23.4 21.4 24.8 22.2 22.9 21.0 20.5 MJ ERVIN & ASSOCIATES 95 .8 20.5 19.6 17.5 22.3 24.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.1 21.5 22.7 22.6 21.1 23.8 24.7 21.9 23.6 23.0 20.9 22.1 25.2 Edmonton Rack 23.3 22.4 20.8 Vancouver Victoria rack rack 24.5 23.9 17.7 17.3 23.3 17.2 21.8 18.3 22.2 20.0 21.4 25.0 23.3 20.9 20.9 23.7 22.0 22.6 24.5 19.5 20.4 24.6 23.2 23.4 22.7 25.8 20.2 20.0 24.7 23.6 20.9 22.8 21.9 18.3 23.3 24.5 22.8 22.4 22.9 24.6 22.2 24.1 17.0 23.5 20.9 22.5 21.9 21.9 22.5 23.9 21.6 21.1 25.4 23.7 24.8 23.5 22.2 21.1 22.7 22.3 21.1 21.1 22.1 25.3 24.0 23.7 21.5 24.1 19.4 21.0 22.5 21.0 22.7 24.1 21.

20 54.16 59.830 2.26 63.246 2.23 53.204.620.88 64.238 2.83 68.980 120.50 56.26 49.614 3.97 63.000 217.628 702.621 102.10 63.060.704.00 48.80 64.058 2.749 243.20 60.702 333.438 591.933 25.475 1.052 84.73 65.11 58.698 Note: Regional.50 55.30 57.65 54.810.448.02 51.000 1.543 2.300 578.935 758.03 58.702.26 44.749 91.72 58.90 62.671 399.196 669.249.166 102.45 63.174.22 59.20 58.25 57.60 70.53 48.414 450.192 2.009 54.55 58.332 101.014 3.101 447.66 50.00 57.643 184.000 63.234 799.17 Diesel 64.377 30.412 722.850 126.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.030.60 50.018 2.50 56.483 2.268 478.10 52.296 179.837 329.554 2.00 57.90 67. MJ ERVIN & ASSOCIATES 96 .53 61.686 273.24 61.42 53.23 63.74 57.87 61.245 351.101 256.529 123.86 56.40 54.997 397.13 58.093.250 748.597 2.859 240.72 74.72 63.89 65.508 2.500 378.10 53.30 63.89 60.70 49.745.20 59.85 48.150 48.85 54.00 66.712 1.30 54.895 600.38 56.18 51.35 73.945. and All Study Markets are weighted (by market population) averages.48 56.220 389.056.36 54.30 68.90 63.678.894 1.890 2.983 1.98 59.972 429.214 248.145.19 52.119 632.120 570.153 316.687 1.241 451.34 63.40 61.00 67.32 51.Table G: Study Market Data .28 65.460 833.400 142.811 120.000 1.19 49.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.370 41.513 19.549 111.858.30 66.796 2.985 636.93 63.45 53.173 568.834 71.905 183.903 33.516.92 51.70 55.07 61.30 52.669 203.00 62.78 67.298 576.949 1.625 64.194.60 49.897 350.483 63. Urban.88 54.60 60.141.770 2.40 59.922 103.40 63.97 51.790 185.557.30 54.102 98.832 91.89 61.40 58.796 529.420.94 55.636.20 61.211 15.334.10 59.113 2.971 473.018.

04 26.73 26.16 29.68 Diesel 36.98 25.42 24.76 24.57 29.65 21.51 25.87 26.33 27.74 21.11 26.09 24.93 27.75 22.45 22.16 22.38 24.17 20.07 26.81 28.43 28.33 22.92 30.49 21.42 27.28 23.94 23.84 28.63 21.49 31.59 22.56 22.83 24.90 26.88 22.59 28.91 21.30 29.43 20.21 27.27 29.90 27.97 25.69 23.13 23.89 26.96 24.33 22.33 22.59 28.59 28.43 21.93 23.07 26.95 22.95 Premium 26.40 25.39 22.99 28.45 20.49 21.33 21.20 27.45 25.63 28.97 22.33 21.59 22.25 28.09 27.25 31.50 20.45 20.41 22.65 27.37 27.76 25.26 28.34 26.03 20.51 20.35 25.39 Note: Regional.42 24.65 26.07 24.83 24.85 28.47 27.15 24.51 25.84 28.64 28.39 22.08 25. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.23 25.45 20.55 28.59 24.45 29.45 28.25 24.43 21.31 22.88 20.89 29.53 23.96 22.03 24.69 27.42 25.55 28.33 21.82 21.23 23. Tax (by Grade) Rack Pt.48 25.03 21.47 28.92 21.39 21.43 20.15 20.18 28.01 22.04 24.93 23.20 20.16 21.45 24.81 27.23 26.15 27.88 20.98 28.28 22.63 24.75 27.92 22.32 21.57 22.63 26. and All Study Markets are weighted (by market population) averages.45 29.02 23.92 20.15 29.25 27.34 20.Rack Price.26 27.40 27.33 21.33 21.83 25.95 25.32 33.81 21.45 20.47 20.78 Product taxes Midgrade Regular 26.95 22.07 24.41 27.96 24. Urban.38 24.45 24.27 20.63 25.82 28.23 24.54 28.97 23.88 22.88 28.73 32.21 27.45 23.49 25.06 28.34 25.83 22.08 23. MJ ERVIN & ASSOCIATES 97 .51 31.89 25.39 21.63 20.50 25.58 25.83 24.99 26.01 28.18 25.81 25.36 26.07 24.83 23.Table H: Study Market Data .88 28.89 28.36 24.

83 12.76 5.86 28.75 23.62 56.00 4.52 5.90 23.38 2.35 58.88 31.68 7.85 26.19 5.10 6.27 60.01 31.60 23.00 0.06 0.98 0.64 3.24 23.96 25.16 20.49 2.89 28.60 7.27 62.45 6.17 1.24 7.96 28.Table J: Study Market Data .04 0.58 1.58 66.66 28.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.71 33.56 24.30 5.31 23.64 1.82 95 Retail Gross Product Margin 6.10 3.73 2.63 58.38 0.31 0.59 4.18 55.22 5.34 1.04 23.48 7.07 30.42 2.07 0.37 26.53 22.25 1.21 24.99 0.85 11.44 33.44 25.02 22.08 55.38 22.11 26.27 6.84 28.29 8.79 33.95 21.75 28.31 34.32 31.26 3.18 7.92 22.06 5.22 1.28 56.29 7.02 0.98 0.89 21.91 0.96 3.70 22.94 Note: Regional.68 7.14 60.23 38.03 7.30 12.16 3.02 3.03 28.81 26.04 22.68 2.82 3.00 58.77 30.90 59.38 7.99 2.35 28.08 3.80 1.21 8.79 0.08 0.38 28.78 2.45 1.93 22.57 12.91 22.00 22.82 32.01 0.26 27.73 1.91 29.29 24.20 5.73 22.91 2.Blended Prices.35 60.85 21.28 1.64 2.41 12.36 0.52 30.24 7.86 49.13 0.41 7. Urban.27 11.34 0.81 28.35 27.97 0.22 14.02 13.16 54.72 26.33 9.36 20.83 36.12 23.50 10.96 27.23 7.53 21.33 .28 1. Costs.21 8.85 24.43 0. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.88 5.89 0. Average Deviation is the average deviation of the market values from their mean (average) value.04 28.54 50.77 37.53 6.15 66.43 23.94 17.39 56.17 26.83 1.60 14.11 31.06 28.08 17.98 31.50 3.(∑x)2 ]/n2.44 56.95 6.83 21.83 27.47 58.17 9.98 1.73 10.51 11.94 22.56 4. Variance uses the formula [n∑x2 .31 28.63 60.50 58. MJ ERVIN & ASSOCIATES 98 . and All Study Markets are weighted (by market population) averages.50 0.77 5.17 11.12 6.26 5.41 29.49 57.05 6.28 27.93 56.13 28.033 0.13 11.20 14.18 21.84 5.47 0.14 7.07 0.80 9.64 3.

707 $ 260.013 $ 227.510 $ 60.144 2. Urban.827.911) $ (166.098 $ (320. Outlet Costs.244 95 net retail Ancillary Revenue petroleum revenue $ 208.626 $ 81.209 $ 26.871) $ (128.746 $ (374.646) $ (98.913 $ 139.694 3.074 $ 131.750 $ 271. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3. these averages are based on all applicable study markets.098.855 $ 278.465.223.542.302 $ 69.837 $ 56.217 2.866) $ (244. For 95 net retail petroleum revenue.502 $ (80) $ 60.058.805. MJ ERVIN & ASSOCIATES 99 .032 $ 77.143) $ (249.000 2.640 4.766) $ (274.272 $ 118.089.067 $ 92.250.394.241) $ (227. and All Study Markets are weighted (by market population) averages.129 $ 97.520 5.224 $ 189.852) $ 119.772.550 694. and consolidated outlet income these averages are based only on those markets with available data.623 2.632 $ 256.780 $ 85.542 $ 222.265.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.800 $ 225.948 3. Revenue.071.102 $ 223.246 $ 118.856 3.023 $ (15.900 $ 179.716 Note: Regional.081 $ 222.993 $ 113.890.481 $ 96.572) $ (286.934 3.066 3.010 1.719 3.208) $ (226.367) $ (164.197. but for ancillary revenue.779 $ 121.Sales.526 $ 207.966 3.000 $ 156.648 3.272 $ 210.622 $ 174.295 $ 174.677 $ 180.995 $ 234.630 3.Table K: Study Market Data .209 $ 82.564 $ 252.117 $ 207.247 4.135 $ 199.658.263 $ 60.557) $ 102.289 981.004.068 3.467 $ 96.014.332) $ (238.000) $ (241.638 2.604.885.794 3.478 4.688 $ 85.011.550 $ 177.956) $ 200.429 $ 238.095. outlet costs.544 $ 175.279 $ 154.375) $ (49.120 $ 54.157.900 2.875 $ 255.

50 8.605 16.058 1.265 2.20 0.10 3.223 3.827 3.06 16 4.157 2.48 7 7. MJ ERVIN & ASSOCIATES 100 .40 9 4.27 1.53 10 6.98 6.475 3.098 4.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.014 5.38 0. inverse ranking is used (lowest value = 1).775.315 710.33 0.250 981 2.08 16 3. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.658 3.790 1.08 4 2.745 16.550 1.22 3.54 6 2.000 pop’n No.43 12.Table L: Study Market Data .73 5 10.00 11.68 4 7.465 694 3.89 7.91 17 4.17 19 9.50 9.52 13 5.004 3.675 179.28 17.30 1.42 5 14.84 12 5.180 616.145 81.Demographic Profiles Population pop’n 299 .30 0.60 3.20 17 14.775 678.21 0. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.870 120.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.55 19 11.06 1 5.40 1 3.095 3.089 3.50 3 10.96 5. rank* 3.85 15 11.36 5.975 2.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.51 9 11.542.60 11 7. of Brands No.13 2 11.02 0.80 10 4.310 1.585 6.23 8 31.06 5.604 3.845 15.394 2.22 0.45 0.275.88 11 8.29 8 7.89 2 4.76 18 5.45 14.73 14.47 14 3. N refers to study sample size (total = 481).47 7.970 330.95 3 9.98 7.24 0.29 1.41 0.08 3.97 8.04 15 4.23 6 7.071 2.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.715 14.27 0.88 12 7.90 13 4.400 74.41 1.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.79 6.01 7 2.91 12. of Outlets No.

a series of studies whose goal is to strengthen Canada’s competitiveness. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. They maintain a large database of historical prices at most major centres. accessible through a public fax-back dial-in system. Ottawa ON. and in doing so. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Principal Address: #400. and provide background resources to industry public affairs managers and the media. Contact: Michael J. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). They work with major oil companies in benchmarking performance in the retail. Petroleum Products Address: 235 Queen Street.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. aviation and lubricants marketing channels. cardlock. Ottawa ON. 119 . K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. generate jobs and growth. Vice President Public Affairs Address: 275 Slater Street. safety and business issues. Contact: Cindy Christopher. bulk. Contact: Maureen Monaghan Address: 580 Booth Street. Senior Advisor. Contact: Brendan Hawley.14th Street NW Calgary AB. health. The SCF is the basis for this study. Ervin. Ottawa ON.

Contact: Len Bradley. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation.Octane Magazine Octane is Canada’s refining and marketing trade journal. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Managing Editor Address: Suite 2450.ab. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . Executive Director Address: 214. Supervisor. 311 . Contact: Gerard O’Connor. and is a useful “window” on this industry. Octane is published quarterly.6th Avenue.6th Ave.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Contact: Robert Curran. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. no 45-004) is a useful source of supply and demand volume data. Energy Section Address: Statistics Canada. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. SW Calgary.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Ottawa ON. 101 . Calgary AB. Its monthly publication “Refined Petroleum Products” (cat.

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